May 17, 2012 – RI Future

May 17, 2012May 17, 2012

Forget About Schilling, Stokes; Let’s Rethink EDC

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As we think about the potential debacle that 38 Studios represents, it’s worth putting a quarter into the time machine and revisiting some great moments in EDC history.

This is from a 2009 column I wrote about EDC (link – scroll down to “EDC: What’s the point?”). A report had just come out scolding EDC’s performance, and this was my review of that report.

But what of EDC itself? The panel complained they were without focus, and alternately complained they didn’t spend enough time working with already-existing local companies and that they don’t have a good marketing approach to attract companies from elsewhere. So which one should the refocused EDC take on? Both, says the panel. That will sure improve the focus, won’t it?

Some background you might not remember: Back in the misty dawn of time, EDC was born as the RI Port Authority and tasked with issuing bonds to develop and preserve the Port of Providence. When the Navy pulled out of Quonset, the Authority’s authority expanded there. Then, in 1995, when Governor Almond decided that the state’s economic development apparatus should no longer be a department of the state, he laid off the entire department, and transformed the Port Authority into EDC.

Why the Port Authority? Simple. Almost alone among state agencies the Port Authority had been granted unlimited borrowing authority when it was formed, which EDC inherited. And borrow they have, for good and for, well, less good. They blew $30 million on Alpha-Beta, a bio-tech flop, and EDC’s authority was a pivotal part of the deal that allowed state debt to balloon in order to pay for the I-boondoggle rearrangement of Route 195. There’s plenty more, including $14 million for the Masonic Temple hotel project, and $30 million for the troubled Wyatt jail in Central Falls.

What’s more, freed from the state personnel system, EDC was free to pay its executives whatever they please, and to conduct their business however they pleased. Their executives could wear good suits, house their operation in first-class office space, and generally conduct themselves just like the overpaid CEOs they spend their time with.

This isn’t to say EDC hasn’t done some good. I’ve written approvingly about the geek dinners they promoted under Saul Kaplan, its last director, and there have been other networking initiatives that bore some fruit, too. But let’s be honest. What’s the point of EDC at all? In large part, the best things the state can do for the state’s economy have to do with those essential things that the private sector can’t (or won’t) do: universal public education; maintaining roads, bridges, water lines and the like; policing the marketplace; protecting the environment; facilitating grant-funded research. These are the factors that could make ours a stronger economy. What an EDC can do will only ever be a minor effect compared to these others.

This, of course, is a political problem for the agency because expectations are so much higher than can be achieved.

What happens at an agency with such an ill-defined and difficult role? Failure, that’s what. Over the years, EDC has seen some good people come through its doors (along with the inevitable few who only look good in a suit) but they’ve been tasked with the impossible. Their mission has been to make our state’s economy bloom despite the fact that we are shrinking our investments in our infrastructure, our workforce and our environment. And what have we seen? Tremendous pressure to do something has produced ill-considered loans, and nebulous and occasionally laughable plans.

A future EDC or something like it could play a useful part in monitoring the state’s economy, and in technology transfer, trying to push new technologies into the market to advantage local businesses. They could be useful promoting networking and centralizing some information businesses need. But our EDC has served mostly as an ATM for corporations, and as a state-paid corporate lobbyist, pushing tax cuts in the legislature, oblivious to the effects these cuts have had on permitting delays, to say nothing of education and bridge maintenance. The agency needs to be rethought, but the changes must go a lot farther than this panel envisions.

A correction is in order: the Alpha-Beta deal only cost the state $4.5 million in the end, since the building was resold. You could argue that the investment worked in that case, since Dow Biopharmaceutical used that space, and has expanded since. The dozen neighbors we displaced through eminent domain on Dow’s behalf might differ, but the real point is that the occasional winner doesn’t prove that a lottery ticket is a good investment. There are investments that will produce a return and investments that might. Which one would you rather bet on?

May 17, 2012May 17, 2012

Stokes Resigns Over 38 Studios Deal

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Keith Stokes, the executive director of the state Economic Development Corporation, resigned yesterday during the emergency meeting concerning the 38 Studios guaranteed loan debacle.

In a post this morning, RI Future predicted this would happen.

Here’s the statement from Governor Chafee:

Yesterday, Keith Stokes offered his resignation as Executive Director of the Rhode Island Economic Development Corporation (RIEDC), which I accepted.

I thank Keith for his service to Rhode Island, not only at the helm of the EDC, but also as a former Board member of that agency and as the long-time Executive Director of the Newport County Chamber of Commerce.

Keith is committed to seeing Rhode Island succeed and I am confident that he will continue to be very involved in the state he loves.

May 17, 2012May 17, 2012

Stokes Pushed Too Hard for 38 Studios Deal

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Expect Keith Stokes to lose his job as executive director of the state Economic Development Corporation over the debacle with 38 Studios. In fact, he ought to offer his resignation, if he hasn’t already.

He pushed for the hugely risky deal and even begged at least one lawmaker not to propose legislation that would have protected taxpayers from the exact danger they are faced with today.

According to the Providence Journal this morning, Rep. Larry Ehrhardt, a North Kingstown Republican, was all set to introduce a bill that would cap the guaranteed loan program that Schilling and 38 Studios benefited from at $10 million per company. 38 Studios got a now-infamous $75 million loan from the program.

“He pleaded with me not to submit the amendment,” Ehrhardt is quoted as saying in the Projo this morning. “He basically said it would upset — and he did not name 38 Studios because none of us or very few of us knew about 38 Studios at the time. His words were something to the effect that it would upset a transaction they were working on …, and I said to him, as a gesture of good faith and trust, I will withdraw the amendment.”

In fact, initially the loan program was only supposed to be for $50 million, but Stokes lobbied to increase it to $125 million. In a fantastic 2010 Projo article, that details how the deal was put together, Stokes is quoted as saying that 38 Studios “shared with us that their capital need was approaching about $75 million. As we started to feel 38 had some legs I went to the leadership and said ‘Why not look at the $50 million and add $75 million’?”

Stokes also seemingly misled Rhode Islanders about the viability of the deal. In 2010, he wrote, “Independent industry and financial experts performed an extensive analysis of the interactive entertainment sector and 38 Studios. Based on months of due diligence, the board then crafted an agreement that includes strict performance milestones 38 Studios must meet and that goes to great lengths to safeguard taxpayers and ensure economic performance. It was the right call at the right time…”

But according to the 2010 Projo article, it was – at best – risky. Here’s an excerpt from that article that speaks to the “due diligence Stokes was referring to:

Strategy Analytics, one of two companies Stokes hired to do the work, said in a letter to the EDC it could do the work within three weeks, a timeline it considered “aggressive.”

In their reports, Strategy Analytics and Perimeter Partners each noted the difficulties of pulling off Stokes’ plan to use one company –– 38 Studios –– as the “anchor” to attract other similar businesses.

The analysts pointed out that Schilling’s company had no sales yet and planned the release of its first game in 2011 and a major multiplayer online game some time after that. “One major difference with Rhode Island’s effort, as we discussed, is that most clusters that bring in ‘anchor’ tenants are established revenue-bearing entities that are producing titles,” wrote Barry Gilbert, of Strategy Analytics.

Many states are trying to create clusters of video-game companies, the reports said. And the cluster strategy takes time –– a decade or longer to develop, Gilbert noted.

Also, there will be competition in the marketplace when 38 Studios releases its multiplayer game, the report stated. Five other companies plan major video-game releases between the end of 2010 and 2012, when 38 Studios plans the release of its multiplayer game, the analysts said. Among the new games will be World of Warcraft: Cataclysm –– a sequel to the dominant multiplayer game, and another based on the “Star Wars” movie series.

“With a large single focus, [the multiplayer game] 38 Studios will have little wiggle room upon release –– this is analogous to an ‘all in’ hand in poker,” stated in the analysts report.

The EDC also was aware of a separate study by Economists Incorporated, commissioned by the video-game industry trade group Entertainment Software, that showed more than 32,000 people directly employed by video-game publishers and developers in 34 states. The study estimated the video-game industry added $4.5 billion to the U.S. economy in 2009.

Keith Stokes is a good man and a good public official. But he pushed too hard for this deal that was too fraught with risk. And as the old saying goes, those who live by the sword should be willing to die by it.

May 17, 2012May 17, 2012

It’s a Showdown in CD1

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Joint Speech to Congress — (via Wikipedia)

Elections didn’t used to be this way in Rhode Island. If you ran for federal office and won, you were pretty much guaranteed an unassailable position from which to plot your next step in life; be that a higher federal office, a cabinet position, retirement, or death. In fact, for roughly three out of four of our federal officers, that’s still pretty much the case. But our newest addition to our federal delegation isn’t finding it so easy.

Yes, the latest news out of WPRI’s pollster Fleming & Associates is that incumbent U.S. Representative David Cicilline has a 4.3% lead among likely primary voters over challenger Anthony Gemma, with 19.9% of voters undecided. Rep. Cicilline triumphed with a 14.1% lead over Mr. Gemma and slightly larger leads over David Segal and Bill Lynch in 2010; a year that had older voters motivated in a right-wing backlash against Barack Obama and the Democratic Party.

The poll ultimately shows that Rep. Cicilline draws strong support from 18-39 year-olds, and has an advantage among female voters. It also shows that according to voters, his apology hasn’t had much impact or made them less likely to vote for him. However, the key issue that 45.7% of voters cared about was “Economy/Jobs”. “Providence Finances” came in fifth at 7.3%, behind “Best Chance to Win in November” (7.9%), “Experience” (11.3%) and “Character” (23.8%).

The good news for Rep. Cicilline is that his job approval ratings are higher among primary voters than the general electorate; in February, just 19.6% of registered voters said that Rep. Cicilline’s job performance was “Excellent” or “Good”. Among likely primary voters, that number is 32.1%. Not stunning, but not terrible either. And since 33.8% of voters rank his performance as “Fair” (whatever that means), there’s a cushion there.

The other good news, one that cuts both ways, is that Anthony Gemma remains an unknown quantity to most primary voters, 45.4% said they didn’t know enough to give him a favorability rating. Among those who did, 37.7% ranked him as “Very” or “Somewhat Favorable”. WPRI’s Joe Fleming points out that this allows Mr. Gemma to build himself up, or alternatively, allows Rep. Cicilline to tear him down.

Mr. Gemma Trying To Ride Two Horses At Once

Mr. Gemma has had some serious issues already. Beyond the initial SNAFU when his announcement devolved into him abandoning it in an attempt to avoid the press, Mr. Gemma has been embroiled in trouble over whether he’d be a sore loser if he fails to triumph in the primary in September; and lingering questions of just how committed he is to the Democratic Party. After a meeting with the Democratic City and Town Committee Chairs Association, Mr. Gemma was blasted by Tiverton Democratic Town Committee chair Mike Burk, who claimed that Mr. Gemma would mount an independent campaign if he lost. Portsmouth Democratic Town Committee chair says that Mr. Gemma said he’d merely write his own name in.

But beyond the he-said, he-said of that particular exchange, Mr. Burk also claimed that Mr. Gemma’s 2012 campaign was reminiscent of his 2010 campaign, which sounded more like he was running for governor than for U.S. representative. Indeed, he’s promised 10,000 jobs to Rhode Island, a claim which sounds far-fetched even if he was running for governor, much less a junior representative in a party likely to be in the minority in the 113th Congress.

Also undercutting him is a problem of insincerity. Having claimed to be the progressive in the race, Mr. Gemma comes from a strong business background, one that was cited for 32 labor violations. He did not vote in the 2008 Democratic presidential primary (one of the closest presidential primary races in recent history), and only affiliated as a Democrat prior to his first run in 2010. He also has said that he is anti-abortion, but would not vote against a woman’s right to choose. Which doesn’t signal strong convictions more than it signals a willingness to do what’s necessary to get elected; a criticism Mr. Gemma has lobbed against Rep. Cicilline on more than one occasion.

Brendan Doherty Lies Waiting in the General

Regardless of which Democrat wins, they’ll run up against Republican Brendan Doherty. Between a WPRI Newsmakers interview where he came out in favor of letting all of the Bush tax cuts expire and a recent statement that he favored the reinstatement of Glass-Steagall to separate commercial and investment banks, Mr. Doherty now has an economic policy far to the left of many Democrats in the U.S. House of Representatives. It should be noted he also has said he favors “right to work” legislation and that Rep. Cicilline has signed onto a bill to reinstate Glass-Steagall and supports ending the Bush tax cuts for those earning more thant $250,000 a year.

But Mr. Doherty’s statement on Glass-Steagall (repealed in the early 1990s under the neoliberal bonanza of the Clinton presidency) raises the specter of accusations during his primary campaign that he was merely a Republican-in-name-only, something which is not helped by Mr. Doherty also having a lead among unionized workers versus Rep. Cicilline in the last poll in which they were matched.

If the economy remains the number one issue for voters, Rhode Island’s Congressional District 1 may have a thunderous battle over economic policies that tilt towards the left if Mr. Cicilline makes it through. On the other hand, Democratic primary voters may face a more traditional interventionist vs. laissez-faire economic debate.

It used to be that federal office in Rhode Island was a secure perch. But even if Mr. Cicilline fails to survive this, his successor, imperfect as the leading two candidates for it are, may face a similar struggle in 2014.