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The Ohio House concluded its active legislative voting sessions at just before 4 AM Friday morning, June 4.  The Ohio Senate concluded at a similar time. A schedule has been announced for the second half of 2010, that calls for several weeks of active voting sessions after the November 2 general election. The schedule is available here.

 

Proposed Extension of Ohio's Third Frontier Initiative

Background

Ohio's Third Frontier initiative was started in 2002 under the leadership of Republican majorities in the Ohio House and Senate. It was a bi-partisan effort that envisioned a $1.6 billion project over 10 years. The primary initial funding was hampered by a heavy focus on capital projects, made necessary by delays in passing the $500 million special bond issue that was supposed to balance the funding package with substantial dollars for non-capital uses. This funding was eventually approved by voters in November of 2005. This delayed full scaling of the program until Fiscal Year 2007, which began on July 1, 2006.

Largely because of the emphasis in early years on capital projects, the early projects focused most on Wright Centers of Innovation, usually located at a research university and aimed at commercializing high tech new products and services.

More recently the scope of Third Frontier funding was pulled back. First, securitization of the tobacco settlement revenue stream removed a portion of the Third Frontier funding that was to go toward biomedical deal flow. Second, the GRF support has dwindled and third the liquor profit support has disappeared.  This leaves two revenue streams, roughly $50 million on average per year for capital improvements out of the capital budget and another $50 million per year for more flexible uses that was approved by voters in 2005.  In other words, a program that was to average $160 million per year has been trimmed back to about $100 million per year.

HJR 12 as introduced

In its current configuration, the proposed ballot initiative would authorize issuance of up to $1 billion in G.O. bonds over a five year period, all exempt from our five percent state constitutional G.O. debt service limit. 

Analysis of proposal to extend Third Frontier into future years

A variety of questions need to be answered as "due diligence" in considering the possibility of seeking voter approval to extend Ohio's Third Frontier initiative. They are:

  1. Where has the money gone so far?
  2. What have we gotten for our investment thus far and what is the outlook?
  3. Are other states making similar investments?
  4. How would the funds in the reauthorization be used?
  5. Where is Ohio headed with its general obligation debt load and how would it be impacted by this proposal?
  6. What kinds of improvements could make this proposal a more responsible and marketable plan?

1. Where has the money gone so far?

Since its start in 2002 a total of $963 million has been awarded through June 30, 2009. Funds distributed during the period totaled $473 million. Breaking the $963 million in awards into broad categories, roughly one-third was awarded to Wright centers and projects. These tend to be at research universities or non-profits that aim to accelerate commercialization.  Another one-third has been committed to developing a series of industry clusters: advanced energy, with an emphasis on fuel cells; advanced materials; biomedical; instruments, controls and electronics; and, power and propulsion. The final third is roughly divided between attracting top research teams and in expanding early stage capital for new economy business ventures.

Primarily because of the timing of the initial voter-approved, flexible-use bonding, more than half of the dollars awarded so far were concentrated in fiscal years 2007 and 2008. However, much of this money will flow out over five years or more.

2. What have we gotten for our investment thus far and what is the outlook?

It is important to point out that the Third Frontier program has been viewed from the outset as a long-term investment that will need to be sustained for a significant period of time to achieve its objectives of accelerating developing Ohio's next economic frontier.

Even so, a number of measures of the initial success of this program have been developed by a private team that took apart an analysis conducted by SRI International and then issued their own report. The industry analysis was led by Rick Fearon, who is Vice Chairman and chief Financial and Planning Office of Eaton Corporation, based in Cleveland. Here are some key points from their findings:

3. Are other states making similar investments?

A survey needs to be done to fully answer this question.  Two states that are often seen as our competitors are offered for review -- Texas and Florida.  In both cases these states have been making significant investments and Texas is using bonding as part of its financing methods.

Texas voters approved a $300 million per year general obligation debt issuance in 2007 that is to total $3 billion to finance a cancer prevention and research institute. In addition, Texas has been using budget reserves and general appropriations to fund industry recruitment and expansion "deal closers" at $181 million since 2003, has $94 million in its new biennial budget for research and commercialization. Also, voters approved this year a re-purposing $400 million of state funds for research university endowments to attract top research teams to Texas.

In Florida, the state has committed roughly $500 million between 2003 and 2006 to attract research institutes from other states. More recently the state has moved to begin investing up to 1.5% of its state public employee pension reserves in high-tech Florida industries. They are also ramping up non-pension funds allocated for investment in venture capital and deal flow.

4. How would the funds in the reauthorization be used?

There has been a shifting of emphasis toward products and services that are closer to market scale. It appears that the mix may be split between venture capital/cluster development and a strengthening of the Wright centers of innovation. Innovation centers and projects will be building stronger connections with private industries and growing in size as they demonstrate successes.

5. Where is Ohio headed with its general obligation debt load and how would it be impacted by this proposal?

This issue continues to be under analysis in the context of the total past, present and future general obligation (G.O.) debt serviced by revenues from the General Revenue Fund and Ohio Lottery proceeds. There is a question about how to consider impacts on our state G.O. bond ratings of debt issued outside the state constitutional debt limits, set by voters in 1999 to be no more than five percent of GRF plus lottery revenues in any year, with some things excepted.

Bond rating agencies and bond underwriters tend to look at the total debt service demand on revenues dedicated to this payment, regardless of the constitutional limits and exceptions to them. With this in mind, it appears that Ohio's high point on this measure, looking back to 1980, was in 2007 at 4.6 percent. Presently the debt service load is artificially low (around 3 percent) because the current operating budget authorizes massive debt restructuring that pushed debt service payments in to future years and because the state is inside a three-year window where school facilities are being financed out of the cash proceeds of securitizing the revenue stream from settlement of the tobacco lawsuit.

It is predicted that this debt service measure will jump to about 5.2 percent in FY 2012 and later reach a peak of around 5.5 percent in FY 19. In this scenario the portion of G.O. debt subject to our state constitutional limit would be held to about 4.9 percent annually, with the remainder being exempt debt service that would grow from about .1 percent this fiscal year to about .26 percent without approval of the current proposal.  Approving extension of Third Frontier bonding would contribute another just under .4 percent in the peak year of FY 19 for a total "outside" load estimated to be .65 percent. This particular scenario assumes four percent growth in GRF revenues and .5 percent growth in lottery profits. It excludes federal stimulus dollars.

6. What kinds of improvements could make this proposal more modest and more marketable to voters?

 Ideas that may be considered to address this question include:

 

 

Resources

[ pending ]

   * Current constitutional language 

   * Proposed constitutional language for ballot  

   * Current revised code

   * Current administrative code

 

 

Paid for by Citizens For Amstutz, Matthew Hochstetler Treasurer, 4456 Woodlake Trail, Wooster, OH 44691