Former Gov. Phil Bredesen’s TNInvestco program, which he promoted in 2009 as a sure fire job and revenue generator for the State of Tennessee, has been a complete financial and economic debacle, the Tennessee Comptroller reported in 2016:
A performance audit from the Tennessee Comptroller’s Office has revealed the State of Tennessee has only recovered $5.3 million of its initial $200 million investment in the TNInvestco program.
The TNInvestco program, which started in 2009 and 2010, is described as a public-private venture capital program intended to help start-up companies create jobs and for the state to eventually receive a return on its investment. As of December 31, 2015, the State of Tennessee has only received 2.6% of the initial investment
The failure of TNInvestco is one topic Bredesen is not likely to highlight when he announces his candidacy for the U.S. Senate seat in the near future, possibly as soon as today.
The program can best be described as a crony capitalist disaster.
The scheme devised by Bredesen was formally known as “The Tennessee Small Business Investment Company Credit Act, commonly known as TNInvestco, [which he] signed into law in July 2009,” The Tennessee Ledger noted:
Under the law, ten local investment firms were selected and received $20 million in “gross premium tax credits,” which they were allowed to resell to businesses that had Tennessee tax liabilities.
The firms sold each $20 million in tax credits for about $15 million in cash. The firms buying the tax credits cut their tax liabilities to Tennessee by $5 million each.
All told, corporate tax revenues were cut by $200 million, as The Tennessee Ledger reported:
The 10-year program apportioned $200 million in gross premium tax credits to Tennessee venture capital funds that had a track record of supporting the growth of new companies within the state. Gross premiums, which are taxed, are premiums expected to be received over the life of an insurance contract.
The tax credits are sold to insurance companies that buy the credits with capital reserves. The venture funds use the capital to assist new small businesses in their development, while the insurance companies are able to annually counteract gross premium tax liability, starting in 2012 and continuing through 2019. That $200 million in credits have garnered more than $146 million in funds.
The ten lucky investment firms who were granted these special tax credit resale privileges were then expected to invest the $15 million they received in cash in early stage companies in Tennessee. When these early stage portfolio companies were sold at a profit over the next three to seven years, the participating investment firm agreed to provide 50 percent of the profit back to the state of Tennessee.
“TNInvestco protocols call for the winners to be chosen by Matt Kisber and Reagan Farr. They are the two Bredesen commissioners who have often teamed to shape state incentives for recruiting industry to Tennessee. The men are, respectively, Bredesen’s chiefs of Economic & Community Development, and Revenue,” Venture Nashville reported in October 2009.
Eight years after the law was signed by then-Gov. Bredesen, Tennessee taxpayers have received only $5.3 million back on the $200 million in lost tax revenues they gave up as part of this scheme.
According to the 2016 Tennessee Comptrollers report, that $5.3 million came from 87 “liquidity events” — that is, portfolio “early stage” companies invested in by the ten local investment companies selected by the Economic & Community Development bureaucrats back in 2009 that garnered $26.6 million upon sale against a base investment of $16 million. Fifty percent of the $10.6 million profit–or $5.3 million– went to the participating investment companies, and $5.3 million went back to the state of Tennessee.
What has become of the other $134 million the ten participating investment companies received from the sale of those $20 million in tax credits they were granted by Gov. Bredesen and his appointees back in 2009?
No one knows for sure, in part because only six of the ten participating local investment companies appear to be in compliance with the law that requires them to submit details on their portfolios for inclusion in the 2016 Annual Report of the Economic and Community Development Department.
But the Tennessee Comptroller is certain of one thing.
“With five years remaining, the department will likely not receive a return nearing the $200 million in tax credits. Additionally, the department has not reported the amount of proceeds received from liquidity events of TNInvestco companies,” (emphasis added) as he said in his 2016 report.
“Because this program is very unpredictable, the department cannot determine how much of the $200 million the state will recoup when the program ends in 2021,” the report added.
Whatever the final amount is recovered from these TNInvestco investments, it will be significantly less than the $200 million taxpayers gave away in tax credits to launch the program.
“In 2009, 10 TNInvestco funds were selected by ECD commissioners,” The Tennessee Ledger reported, which named the participating firms: (1) XMi High Growth Development Fund, Nashville and Chattanooga, (2) Tennessee Community Ventures Fund, Nashville, (3) Limestone Fund, Nashville, (4) Tri-Star Technology Ventures, Nashville, (5) Innova Fund II, Memphis, (6) Council & Enhanced Tennessee Fund, Nashville, (7) Memphis Biomed Venture Partners, Memphis, (8)Tennessee Angel Fund, Nashville, (9), Solidus-TNInvestco, Nashville, and (10) MB Ventures.
Only six of the ten participating companies reported results in the 2016 TNInvestco Annual Report: Council & Enhancement, Innova, Limestone, MB Ventures, Nest TN, and Solidus.
The four firms that were missing in action, in terms of reporting, included Tennessee Angel Fund, Memphis Biomed Venture Partners, Tennessee Community Ventures, and Tri-Star Technology Ventures.
Back in 2012, two years out of the Governor’s office, Bredesen defended the program in an interview with the City Paper.
“I’m sure you saw that the comptroller had a report pointing a lot of fingers at TNInvestco [a Bredesen-created program designed to increase the flow of capital to companies in Tennessee],” the City Paper noted , referencing an earlier 2012 report from the Tennessee Comptroller criticizing the then three-year old program.
“The problem with TNInvestco was it has been that — that kind of program in a lot of states has been a very insider program where a bunch of people got wired for deals and all this kind of stuff,” Bredesen conceded.
“I really think there was no favoritism,” Bredesen said of the way in which ten participating venture capital firms were selected to benefit from the opportunity to obtain $20 million in tax credits, adding:
I mean my former chief of staff [Stuart Brunson] was mad at me because he didn’t get an award. I mean he applied with a bunch of people, and I think, but it wasn’t — he didn’t win. And there were a few people that didn’t get awards that thought they should have, and they’ve been keeping [controversy] alive for, you know, a long time now. It was a sort of a venture capital program. I think it was well put together and run, and — and like everything, when you have winners and losers sometimes the losers don’t like it and — and they, you know, they’re agitated about it, but I don’t have any.
But at the time, Bredesen was unrepentant for launching his pet TNInvestco project.
“I don’t have any concerns the way that program was run,” he told the City Paper at the time.
Five years later, one year after the publication of an even more critical 2016 Tennessee Comptroller’s report, Tennessee taxpayers have a very different view of the insiders crony capitalist deal Bredesen put together as governor.
When all the financial results are finally known, Tennessee taxpayers will be fortunate to keep their losses from Bredesen’s boondoggle under $100 million.