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Commerce Authority ‘stipends’ draw scrutiny

The Arizona Commerce Authority set off alarms at the Goldwater Institute this week after the government agency announced it would be awarding thousands of dollars to companies that were eliminated from a competitive grant program.

At a Wednesday event to reveal which of the 25 semifinalist companies would move on to the next round in the ACA’s Innovation Challenge, CEO Don Cardon surprised the crowd when he announced that each of the 15 companies that did not make the cut would be awarded $5,000 each – a total of $75,000.

“What they have right now is a lot of sweat and maxed out credit cards,” Cardon said after the event, calling the money something similar to a stipend or “seed capital.”

But if the awards are not tied to creating a tangible public benefit for Arizona, they could violate the state’s Gift Clause, a fact pointed out to the ACA Thursday in a letter from Clint Bolick, director of the Goldwater Institute’s litigation unit. `

Bolick cited the CityNorth opinion in which the Arizona Supreme Court in 2010 declared that government subsidies are illegal unless the benefits in return are of equal value. The case involved Phoenix’s nearly $100 million subsidy to a shopping mall developer.

“As such, the payments appear to be more in the nature of a slush fund rather than the type of carefully delineated expenditures that are permitted under the Gift Clause,” Bolick wrote of the ACA’s announcement of the awards.

The letter did not allude to any action the institute might take, but it did express the hope that the ACA would “consider the legality of those payments before they are issued.”

Bolick later said the Goldwater Institute hasn’t decided yet whether it will sue over the payments.

“It’s always a possibility. We’re trying to keep a very careful eye at what’s happening at the Commerce Authority, and certainly would always keep our litigation options open,” Bolick said today. “We’ll certainly give them an opportunity to give us a response.”

While the ACA has since indicated that there will be strings attached to the money, spokeswoman Kristen Hellmer, communicating through email, did not immediately specify what those strings might entail beyond “mutually agreed upon obligations.”

It is also unclear where the $75,000 will come from. At the event, Cardon said he did not know, deferring to Hellmer, who speculated that it would come from the ACA’s operational budget. Hellmer has not confirmed that information.

The announcement of the additional awards came as a surprise for the gathered companies, ACA employees and even the governor’s office. Hellmer said that she did not know about the announcement before the event, but assumed the decision had been made by Cardon Wednesday morning. She added later in an email that Arizona statutes give Cardon the authority as the CEO to make decisions about awarding money.

Even Brian Sherman, the ACA vice-president who runs the Innovation Challenge, seemed caught off-guard by the announcement, making an off-the-cuff joke about the award during his presentation.

“Don’s given you a bit of a stipend. I’m not sure what you are going to use that for, but I’m sure you’ll use your creativity there,” Sherman said, eliciting chuckles from the equally surprised entrepreneurs.

Brewer spokesman Matthew Benson said Thursday that the Ninth Floor had no idea that losing applicants would be awarded money, but echoed Hellmer in noting that the Commerce Authority would be creating obligations for the recipients of the $5,000 checks.

The news of the obligations might come as a surprise to the 15 semifinalists.

Boris Rotman, a vice-president at BCR Diagnostics, said the ACA has not contacted him with any more information about the $5,000 beyond the Wednesday announcement. While he plans to try again in the next challenge, he noted that his company, which was hoping to use the grant to commercialize a low-cost HIV test, spent more than $5,000 preparing their application.

“It is a consolation prize,” he said. “It is not going to make all that much difference to us.”

To conservative critics of the ACA, the $5,000 stipends were yet one more red flag. Rep. John Kavanagh, R-Fountain Hills, said the payments were “poor policy” and “disturbing.”

“It convinces me that I’m going to be submitting a project next year,” Kavanagh joked. “It almost encourages people to submit because you’ll be reimbursed $5,000 if your project isn’t any good. That certainly raises a few eyebrows and certainly feeds into the perception that the Commerce Authority is a little bit too free with money.”

The 25 Innovation Challenge semifinalists were chosen from a pool of more than 300 applicants, all competing for grants of $100,000 to $250,000 from a pot of $1.5 million budgeted for the challenge. The program is geared at helping companies in technology fields like aerospace, renewable energy, and life sciences to commercialize a new product. Grant winners are required to generate revenue from their new technology within one year.

Steve Voeller, president of the Arizona Free Enterprise Club, said the payments are troubling, and demonstrate a lack of transparency or accountability at the ACA. Few Arizonans, he said, are probably even aware of the payments.

“I don’t think most taxpayers would be too pleased that grants are being awarded to people who fail,” he said.

Even some in the highest levels of government were unaware that the payments had occurred. Senate Majority Leader Andy Biggs, one of the only Republican legislators who voted against the omnibus economic development bill that created the ACA in 2011, said he didn’t know about the payments.

Biggs, R-Gilbert, told the Arizona Capitol Times that he would call the Commerce Authority and find out what happened before he commented on the payments. But he said it would be problematic if the ACA is giving money to companies that don’t deserve it.

“There’s a problem if you’re just giving gifts out from the state. I want to look at it more. I need to find out more about it and see what the theory is,” Biggs said.

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