by Andrew Walden
Hawaii's High-Tech tax credit scammers have found a new home in the Hawaii Strategic Development Corporation (HSDC) and a new target in the Employees’ Retirement System (ERS).
State retirees should be afraid, be very afraid. But first, a history lesson:
A July, 2012 State Audit shows the State gave away $1B in Act 221 Tax Credits without verification of eligibility. But this was a mere post-mortem for the decade-long Act 215/221 con game. The end came in three years earlier with passage of SB 199 CD2 which, in the words of Rep Isaac Choy, made the tax credits “no longer attractive to people who only want to avoid taxes...”
At the time the response was sharp. In a July 26, 2009 Honolulu Advertiser column, Act 221 propagandist Jay Fidell cried, “we are in an economic wilderness, unprepared…. It's nice to say the state should ‘replace’ 221, but think again. A resurrection of 221 will carry old baggage. A new tech incentive will be suspect…. Any ‘replacement’ will be worked over as it goes through the sausage machine…. You've taught us not to rely on government, but rather to invent solutions outside of government.”
How were tax credit scammers, whose entire existence consists of stealing from the General Fund, going to “invent solutions outside of government?”
Now, after four years in the wilderness, the answer is emerging. They are taking shelter from the rest of the government by placing themselves in the HSDC.
A December 12, 2013 news release from HSDC’s “HI Growth Initiative” touts “’Startup Paradise’ Launched at 4th Annual VC Summit.”
Pre-election money is flowing from the Abercrombie administration via two bills singed into law by Lt Gov Shan Tsutsui July 9, 2013:
House Bill 858 appropriates funds to the Hawaii Strategic Development Corporation for the HI Growth Initiative. The initiative is an investment program to develop an ecosystem to support high-growth entrepreneurial companies in the State.
Senate Bill 1349 reenacts the tax credit for qualified research activities for 6 years.
There have been several such initiatives in the post-221 era, each dribbling out a few tens of millions to people used to much more. But gradually these have come together into a coherent system for the thieves market to rise like Phoenix from the ashes of 2009.
Resurrection planning began immediately.
In a September, 2009 talk to the mis-named Hawaii Venture Capital Association, newly appointed HSDC President Karl Fooks outlined the strategy:
1. Angel investment tax credits: perhaps a continuation of Act 221; 16 other states have similar tax credits, averaging about 50% of invested amount, and capping total tax credits that can be taken.
2. State funds-of-funds to encourage and leverage private capital for venture funds: Utah has a model like the Act 215 SPIF; Pennsylvania's program uses loans from insurance companies guaranteed by state tax credits to directly invest in targeted venture funds; and Tennessee has launched its program to raise a fund by selling off state tax credits and placing investments with venture funds on a competitive bid basis.
3. Entrepreneurs in residence: drawing upon the expertise of successful tech entrepreneurs to guide venture funds and state and federal grant feeder agencies.
4. Equity/debt venture funds: there is interest in mezzanine financing through bridge loans convertible by a call on equity in the event of successful exits.
5. Local venture funds partnering or syndicating with Mainland funds for broader deal opportunities and heightened levels of domain expertise.
In a 2011 interview, Fooks took aim at ERS and Kamehameha Schools:
“It’s too difficult for big institutional investors to go around investing directly in companies,” says Karl Fooks, president of the Hawaii Strategic Development Corp., a state fund of funds that invests in other VC firms. “They want to invest in a smart fund manager who then picks the right companies for their business focus.”
According to Dick, Kamehameha Schools is an investor in Startup Capital, which is one of the companies financing Adama Materials, and other Hawaii businesses. Similarly, the ERS is investing up to $25 million in VC funds that may include exposure to local portfolio companies through its Hawaii Targeted Investment Program (HiTIP).
“Our expectation is that approximately one-third of the total capital will have local exposure through venture-capital funds, some based in Hawaii and others based on the Mainland,” says Wesley Machida, ERS administrator.
How will scammers tap into the ERS portfolio? The HSDC: State Small Business Credit Initiative webpage explains:
HSDC will focus on earlier stage investment funds that can create deal flow for the larger, established venture capital funds the Employee Retirement System’s (ERS) venture capital investment program has invested in. By complementing ERS’s investment program, HSDC hopes to catalyze a broader spectrum of investment capital for Hawaii’s innovation sector. Also, the earlier stage focus will allow investment managers to provide more intensive, hands-on mentoring to portfolio companies and prepare them to compete for their next round of funding….
The July, 2012 State Audit criticized DoTax oversight of Act221 tax credits, highlighting a DoTAX returns classifying officer’s response when asked why he does not have any written policies and procedures to guide him through the audit identification and selection process--“It’s all in [my] head.”
Taking a page from the same playbook, HSDC’s website describes the process for interested fund managers to apply for HSDC investment:
HSDC will not conduct a formal RFP process. Please contact HSDC with any investment proposals. The HSDC Board of Directors will review investment proposals and determine their fit with HSDC’s investment program and investment portfolio.
Hawaii State employees were promised a retirement pension. If HSDC gets its way, politically connected corporate welfare queens will walk away laughing while retirees' portfolio gets saddled with spectacular Hi Tech Tax Credit disasters like Hoku’s failed Idaho polysilicon plant.
You have been warned.
UPDATE: "The Hawaii Strategic Development Corporation has been repealed effective July 1, 2019."
HSDC HiTech Schemes: