- State lawmakers have returned to Raleigh for a session of budget adjustments, which includes funding for NCInnovation.
- Other states with similar programs have poor track records, and NCInnovation has no track record itself.
- Lawmakers should prioritize appropriate uses of taxpayer funds before finding reasons to fund non-core programs.
It is budget season on Jones Street in Raleigh, as state lawmakers have returned for the legislative “short session.” The short session is convened in even-numbered years, before general elections, and its primary focus is the fiscal matters of the state budget – taxes and spending.
One major item up for debate in the 2024 session is the issue of $250 million for a nonprofit called NCInnovation (NCI). The purpose of NCI is to provide grants to further applied research at select UNC-system universities to fill an observed gap in the local commercialization of public university research. In and of itself, this goal is laudable for the private sector, not for taxpayer funding.
With an initial budget proposal of $1.4 billion, NCI received $250 million in 2023, with the promise of $250 million in additional state funding if it meets certain mission benchmarks – bringing realized and promised taxpayer funding to $500 million in two installments.
The John Locke Foundation has conducted extensive research on the topic and published numerous articles. With all of the information at hand, it’s time for lawmakers to cancel the second payment of $250 million to this inventive corporate welfare nonprofit and look for more responsible uses of taxpayer funds.
If we examine the case for public funding of NCInnovation, it is becoming clearer that the prospect is uncompelling.
NCInnovation is a corporate welfare program
First, is NCInnovation a corporate welfare program? The John Locke Foundation and NCInnovation have exchanged many emails about this idea.
Pat Ryan, NCI’s spokesperson and former deputy chief of staff to state Senate leader Phil Berger, contacted Locke[i] in March to ask for corrections to articles in which we have asserted that NCI is a corporate welfare program. NCI claims that it is not, and Locke disagrees.
First, what is corporate welfare? The Oxford English Dictionary defines “corporate welfare” as “Government support or subsidy of private business (esp. large companies or business organizations) through tax incentives, grants, etc.”[ii]
So, what does NCI do? According to the “Frequently Asked Questions” document on their website, NCI says:
We provide grant funding and support services to university applied researchers working on discoveries that have commercial promise. NCInnovation helps inventions advance towards commercialization – accelerating the transition from academia to industry – by supporting university applied research through the critical R&D phase between proof concept and readiness for the private market.[iii]
In other words, NCI is not providing funding to existing companies. However, NCI is providing grant funding to pre-existing companies through an endowment of $250 million – potentially climbing to $500 million – provided by the state government.
“We will offer grant funding, delivered through universities in stages and subject to binding legal agreements, to get researchers to the point their product becomes commercially investible. In doing so, more companies will form[emphasis added] out of university research,” is how Kelly King, former CEO of Truist Financial and NCI’s board chair, explained the process in an op-ed.[iv]
However, creating companies is not NCI’s only metric. Again, according to NCI’s Frequently Asked Questions, “Company formation isn’t the only important output – licensing new technologies to existing companies matters, too.” In other words, existing corporations will also benefit from the taxpayer-funded applied research from public universities that benefited from NCI. It does not take a mental leap to understand that this is taxpayers subsidizing businesses.
This is corporate welfare and raises further concerns about market distortions in the North Carolina economy.
Fiscal conservatives generally advocate for limited government intervention in the economy and favor free market principles. Providing such a substantial sum of public money to a specific organization can distort the natural market forces by artificially promoting certain research endeavors over others. This type of funding may pick winners and losers in the innovation landscape, potentially directing resources towards projects that align with government priorities rather than those driven by genuine market demand or private sector investment.
Additionally, such a significant investment in a single organization could create dependency on government subsidies, discouraging self-sufficiency and innovation driven by private enterprise. Fiscal conservatives would argue that this approach risks inefficient resource allocation and undermines the principles of free market competition and individual enterprise that are essential for long-term economic growth and prosperity.
This type of scheme is not why taxpayers pay income and sales taxes; it is not a core constitutional government service.
Bad record in other states
Reasonable minds can agree that $500 million is a lot of money. Before taxpayers are asked to provide half a billion dollars on which they will only receive a tangential return on any eventual economic output, perhaps they should be provided with assurances that NCInnovation can do the job it purports and that such programs have worked in other states. But neither other states nor NCI have a track record of which a typical taxpayer would approve.
Neither other states nor NCI have a track record of which a typical taxpayer would approve.
On its website, NCI cites several states it claims have similar programs.
NCI cites Texas and says, “In the 2000s, the state legislature allocated nearly $1 billion for applied research and commercialization activities,” but the program they’re referencing, the Emerging Technology Fund, has been referred to as “scandal-plagued,”[v] having benefited donors to former Texas Gov. Rick Perry. The Texas legislature defunded this program in 2015 at the request of Gov. Greg Abbot (R).
NCI cites the Georgia Research Alliance (GRA) as a successful example. But a 2013 audit – the only audit Locke could find – of GRA’s VentureLab program found poor success and low transparency. As my colleague, Brian Balfour, wrote, “The audit found that ‘50% (101) of the 201 known participants in VentureLab (from 2003 to 2011) were actively doing business in Georgia or in the process of starting a business at the end of calendar year 2011,’ which means that the other half were either ‘inactive’ or ‘had no evidence to indicate they were active in Georgia in 2011.’”[vi]
NCI cites the Massachusetts Life Sciences Center (MLSC), but MLSC and NCI are dissimilar programs. Yes, the Massachusetts legislature allocated $1 billion in 2008, but through various funding vehicles. About three-fourths of the Massachusetts funding is for infrastructure upgrades to bring biotech firms to the Commonwealth or tax incentives to attract businesses. As Locke has written before, “Neither of these programs are similar to the proposed activities of NCInnovation. Instead, they are similar to the traditional capital and infrastructure expenditures already captured in our state budget, tax credits offered through our Job Development Investment Grant (JDIG) program, and grants offered through the Golden LEAF Foundation.”[vii]
If Massachusetts is the comparison NCI wants, it’s a bad one because North Carolina already has these programs.
NCI cites the “$2.3 billion in public funds to support applied research, commercialization, and early-stage capital formation” for the Ohio Third Frontier Program. But the differences appear immediately. Ohio Third Frontier is a division of the Ohio Department of Development, a government entity and not an independent organization. Further, the Third Frontier website[viii] indicates that it is, in fact, directly subsidizing existing companies, which NCI’s staff has been adamant that it will not do.
A program more similar to NCI, JobsOhio, is an independent nonprofit with state funding but has dire transparency issues. In fact, in 2013, the Ohio General Assembly moved to block JobsOhio from being subject to a state audit.[ix] This example brings up all the original governance and transparency concerns with NCI before last year’s budget was passed.[x]
NCInnovation has no track record
According to NCI, the organization began as a “discussion between North Carolina business executives” in 2018; state records indicate that it was established in February 2020.
In the four years and two months since its inception, NCI – ostensibly a grant-making organization – has issued no grants. In a March 20 email to the John Locke Foundation, Pat Ryan, NCI’s spokesperson, wrote, “NCInnovation has not awarded any research grants to date.”
NCI advocates will probably argue that the grants would flow out of the interest from the state-funded endowment they have yet to fully receive. However, that lack of cash flow did not prevent NCInnovation from spending $288,000 in lobbying fees in 2023 or providing the staff for the grant-making organization with $175,000 in bonuses in September 2023, before they ever awarded a single grant.[xi]
The John Locke Foundation is also a nonprofit, and sometimes, it can take a while to secure operational funding and get projects off the ground. However, Locke does not take public funds and does not ask donors to risk $500 million on something that has not been done before in North Carolina. However, that is the situation with NCInnovation.
Fundraising is also a question for NCI’s track record. The organization proudly touted recently that it has reached the statutory requirement of $25 million in financial commitments[xii] to qualify for the next $250 million in state funding. But that is all they are – commitments, not cash on hand.
Funding the next $250 million is a risky proposition for taxpayers. Allocating funds for industrial innovation through either government bureaucrats or a single nonprofit organization like NCInnovation, especially considering they may see no direct return on their investment, is a risk.
In a state as diverse and complex as North Carolina, with a dynamic economy spanning multiple industries and regions, expecting a single nonprofit entity to possess the comprehensive knowledge required to direct taxpayer-funded grants effectively is challenging and likely impractical. The economy encompasses sectors ranging from technology and agriculture to manufacturing and services, each with unique needs and market dynamics. Understanding these nuances demands deep industry expertise and local insights that may exceed the capacity of a centralized approach. NCInnovation will argue that that is why they have created regional innovation hubs at some public universities, but that is still under a centralized investment vision.
Further, relying solely on a single organization for grant distribution risks misallocation, favoritism, or missed opportunities that could be identified through decentralized, market-driven processes where private investors and entrepreneurs are better equipped to assess and respond efficiently to market demands. Grants should be based on merits, but whose merits?
A recent letter somehow obtained by the North State Journal and addressed vaguely to “Friends” pushes back on some of Locke’s arguments.[xiii] Erica Shrader, NCI’s vice president for corporate affairs and another former deputy chief of staff for state Senate President Pro Tem Phil Berger, authored the letter wherein she says that Locke has “pivoted” from arguing against NCI because it is a corporate welfare program to arguing against its grant-funding program.
Locke has been around for a long time, and we can walk and chew gum at the same time. Clearly, we still assert that NCI is a corporate welfare scheme and have concerns about market distortion. We are also concerned about the grants it will allocate, how they will be allocated, the taxpayer transparency to those grants, and whether or not this type of government spending is appropriate at all.
Obviously, a grant-based program should be merit-based, but whose merit system? How will NCI decide if a medical technology researcher from East Carolina University should merit funding over an aeronautics researcher from North Carolina A&T? What is the rubric? How will NCI grade future market viability of one product over another? What is the organizational expertise on the various areas of applied research? Of course, merits must be calculated, but how? And therein lies the problem.
What expertise does NCI have that the private sector does not in the area of technology innovation? State lawmakers proudly and rightly touted North Carolina repeating as CNBC’s “Top State for Business” in 2023,[xiv] but looking into the scores, we find that the Old North State ranked No. 6 in the “Technology and Innovation” category and No. 6 in the “Access to Capital” category. These rankings are not a sign of a state whose private sector is falling behind in the problem NCI is trying to fix – in fact, it’s the opposite.
NCI has only just recently launched a pilot program,[xv] which means that NCI itself is just now testing the waters on how to administer grants. This pilot program may answer some of the questions that have arisen, but there are currently too many unanswered questions for lawmakers to greenlight another quarter of a billion dollars to an independent nonprofit. Especially one that is likely to return to the state legislature asking for more funding in the future.
NCInnovation will be back for more taxpayer funding
According to NCI’s 2023 pitchbook,[xvi] the original funding strategy was to “lead a sustained advocacy effort to secure at least a $250 million annual public commitment over a minimum of 10 years, or $2.5 billion total, supplemented with private resources.”
In the 2023 legislative budget process, the $2.5 billion was converted into a $1.425 billion allocation to a newly created NCInnovation Reserve in the state Senate’s budget proposal. Bennet Waters, NCI’s CEO, had the temerity to tell WRAL that the $1.425 billion was the “minimally acceptable amount” of funding from the General Assembly.[xvii]
Remember, NCInnovation received $250 million in the 2023 budget, with a potential for another $250 million if they checked particular boxes outlined in the state budget. These numbers sound incredibly similar to the original fundraising goals in the pitchbook but are still well short of the “minimally acceptable amount” of $1.4 billion cited by Waters.
With these context clues, it is incredibly likely that lawmakers will see NCI lobbyists, of which there are seven registered now, with hat in hand asking for funding in 2025 and beyond. The simplest solution is for state legislators to say “no” to the second $250 million and be done with this altogether. North Carolina taxpayers do not deserve to be under siege from a multi-million-dollar venture capital nonprofit annually.
North Carolina has other priorities
Any state budget is always a debate of competing priorities. Public education and Medicaid make up the lion’s share of the state budget, which means that the scarcity argument for public funding becomes even more nuanced. This year, it doesn’t take much work to find greater or more deserving priorities for these tax dollars than NCInnovation.
This year, it doesn’t take much work to find greater or more deserving priorities for these tax dollars than NCInnovation.
The state Opportunity Scholarship Program, a school choice program with 72,000 applicants this year, has a $248 million funding shortfall. The state Senate has moved to fund the shortfall.[xviii] Transferring the $250 million from the NCInnovation Reserve to the Opportunity Scholarship Reserve would require no new spending.
The State Health Plan faces a future funding shortfall in the billions of dollars. The State Highway Reserve Fund is currently healthy, but the onset of electric and hybrid vehicles makes the state’s gas tax-reliant funding model more tenuous every year. State lawmakers still have not seen the full fiscal impact of Medicaid expansion, which they enacted last year. Legislators should not rush to send a quarter of a billion taxpayer dollars to something that is not a core government service when it’s clear that there are other priorities.
Finally, North Carolina has seen more than a decade of economic and fiscal success due to state lawmakers’ smart budget and tax policies. This year, there is another revenue surplus, but the lesson remains the same – just because lawmakers can spend the money on pet projects for some business interests doesn’t mean they should.
[i] Balfour, Brian. “NCInnovation: Time to Pump the Brakes on This Unproven Experiment?” John Locke Foundation, March 21, 2024. https://www.johnlocke.org/ncinnovation-time-to-pump-the-brakes-on-this-unproven-experiment/.
[ii] “Corporate Welfare.” Oxford English Dictionary. Accessed May 2, 2024. https://www.oed.com/search/dictionary/?scope=Entries&q=corporate+welfare.
[iii] “Frequently Asked Questions.” NCInnovation, Accessed May 2, 2024. https://ncinnovation.org/app/uploads/2024/04/NCInnovation_FAQ.pdf.
[iv] King, Kelly. “King Explains NCInnovation’s Mission and Benefits.” Business North Carolina, July 18, 2023. https://businessnc.com/op-ed-king-explains-ncinnovations-mission-and-benefits/.
[v] Stutz, Terrence. “Texas Senate Moves to Abolish Scandal-Plagued Emerging Technology Fund.” GovTech, April 30, 2015. https://www.govtech.com/workforce/texas-senate-moves-to-abolish-scandal-plagued-emerging-technology-fund.html.
[vi] Balfour, Brian. “Georgia Project Praised by NCInnovation Suffers Poor Track Record, Lack of Transparency.” John Locke Foundation, July 25, 2023. https://www.johnlocke.org/georgia-project-praised-by-ncinnovation-suffers-poor-track-record-lack-of-transparency/.
[vii] Balfour, Brian. “Examining the NCInnovation Controversy: Debunking the Massachusetts Life Science Center Comparison.” John Locke Foundation, July 19, 2023. https://www.johnlocke.org/examining-the-ncinnovation-controversy-debunking-the-massachusetts-life-science-center-comparison/.
[viii] Ohio Third Frontier. Accessed May 2, 2024. https://ohio.gov/business/resources/ohio-third-frontier.
[ix] Tobias, Andrew J. “Ohio Lawmakers Move to Block JobsOhio from State Audit.” Dayton Daily News, May 29, 2013. https://www.daytondailynews.com/news/state–regional-govt–politics/ohio-lawmakers-move-block-jobsohio-from-state-audit/7xI7BZ5iQC6WTM0RCJvlhN/.
[x] Bryson, Donald. “Four Critical Questions on NCInnovation’s Governance and the State Budget.” Carolina Journal, May 23, 2023. https://www.carolinajournal.com/opinion/four-critical-questions-on-ncinnovations-governance-and-the-state-budget/.
[xi] Moore, Jeff. “ROI: NCInnovation Spent Big on Lobbying, Staff Bonuses, before Receiving $250 Million in Taxpayer Funds.” Carolina Journal, February 20, 2024. https://www.carolinajournal.com/roi-nc-innovation-spent-big-on-lobbying-staff-bonuses-before-receiving-250-million-in-taxpayer-funds/.
[xii] “NCInnovation Surpasses $25 Million in Private Fundraising Commitments.” NCInnovation, April 23, 2024. https://ncinnovation.org/media/ncinnovation-surpasses-25-million-in-private-fundraising-commitments/.
[xiii] Dillon, A.P. “NCInnovation Fires Back at Right-Leaning Think Tank.” The North State Journal, May 1, 2024. https://nsjonline.com/article/2024/05/ncinnovation-fires-back-at-right-leaning-think-tank/.
[xiv] “America’s Top States for Business 2023: The Full Rankings.” CNBC, July 11, 2023. https://www.cnbc.com/2023/07/11/americas-top-states-for-business-2023-the-full-rankings.html.
[xv] “NCInnovation Launches Pilot Grant Program to Accelerate University Research Commercialization across North Carolina.” NCInnovation, April 8, 2024. https://ncinnovation.org/media/ncinnovation-launches-pilot-grant-program-to-accelerate-university-research-commercialization-across-north-carolina/.
[xvi] “NCInnovation – Optimizing Innovation for North Carolina.” NCInnovation. Accessed May 1, 2024. https://ncinnovation.org/app/uploads/2023/01/NCI-Pitchbook.pdf.
[xvii] Fain, Travis, ed. “NC Lawmakers Weigh Big Swing on Economic Development, Using $1.43 Billion from Taxpayers.” WRAL, July 16, 2023. https://www.wral.com/story/nc-lawmakers-weigh-big-swing-on-economic-development-using-1-43-billion-from-taxpayers/20954621/.
[xviii] Bass, David N. “Sparks Fly as NC Senate Committee Oks Bill to Fund Waitlist for Opportunity Scholarships.” Carolina Journal, May 1, 2024. https://www.carolinajournal.com/sparks-fly-as-nc-senate-committee-oks-bill-to-fund-waitlist-for-opportunity-scholarships/.
