In 2019, then-West Virginia Treasurer John Perdue had a problem.
Throughout the 2000s, West Virginia spent nearly $25 million on a controversial program that funneled state money to risky investments. They didn’t pan out, and Perdue wanted to tally up the losses and end the program for good.
But when state employees showed up at the agency tasked with overseeing the program, they were told that years of records weren’t available — and might have been destroyed.
Concerned, Perdue tipped off state auditors, who released a scathing report earlier this week that criticized both the underlying design of the program and the dizzying lack of state oversight that allowed more than $20 million in state funds to evaporate, at least $8 million of it out-of-state.
The seeds of this debacle are ancient history — the millions were given away over a decade ago. But the implications are not.
West Virginia continues to struggle with the same problems — an over-reliance on extraction industries and a failure to attract an educated workforce — that the state program was created to address in the first place. And the state’s oversight failure is concerning — it is relying on the same agency, the Economic Development Authority, to oversee its current modernization efforts, including the governor’s program to stimulate tens of millions of dollars in spending on improved broadband.
Now, as this year’s session begins with legislators intent on passing a new economic stimulus, the new state treasurer is calling for a crackdown so the state doesn’t repeat its errors of the past.
‘I couldn’t find a deal to do’
Between 1988 and 1997, West Virginia gave away an average of $90 million a year in tax credits to businesses, in an effort to bring new jobs to the state and diversify the economy.
While figures about state spending on economic development incentives periodically come out in audits or reports, the state shields much of the work of development agencies from public view with a broad public records law exemption. But after state tax analysts revealed the state was paying up to $2 million per job, and later that many of the credits were entirely ineffective, then-Gov. Bob Wise proposed reforms.
So the state passed new laws. One of them, the 2002 West Virginia Venture Capital Act, replaced a tax credit for venture capitalists with a $25 million fund managed by the Economic Development Authority. The money would be loaned out by the state and disbursed to venture capitalists — to be repaid, hopefully, with interest.
It never was. By the time Perdue was seeking to shut it down nearly two decades later, only around $3.8 million had been returned to the state and the rest of the investments had been “written down to $0,” according to auditors.
One recipient of the funds evidently believed the funds did not need to be repaid. Guy Peduto, director of INNOVA, a Fairmont-based organization that provides training and money to early-stage startups, told Mountain State Spotlight in an email that the funds were a “grant,” rather than a loan or investment. INNOVA received nearly $750,000, which it used to “help encourage and seed early stage entrepreneurism and start-up activity,” Peduto wrote.
When they tried to piece together a financial paper trail, auditors found their task complicated by missing records. Financial statements were kept in “three-ring binders” and years of supporting documentation were apparently missing, and “could have been included in one of the boxes that have been destroyed,” auditors were told.
And despite the law explicitly stating that it was intended to create “jobs and businesses within the State” at least two payments — totaling $8 million — went entirely outside the state, auditors found.
One of those was to Anthem Capital, a Maryland firm specializing in biotech investments that was courted by state officials. One of its partners, Ed Spiva, moved to Morgantown from Baltimore after the state invested $4 million in his fund.
A requirement of the deal, enshrined in law, was that any recipients of the fund must have an office in West Virginia. But, it turned out, the law didn’t require that Spiva actually invest the money in West Virginia businesses.
So he didn’t. “I couldn’t find a deal to do,” he admitted.
Spiva is now retired, but recalled over the phone the challenges facing his firm’s foray into the state.
“At the time the whole venture capital industry was caving in on itself because the internet bubble burst,” he said.
But he also laid blame on West Virginia. “They didn’t have the technology or the expertise to do it,” he said. He spent two years talking to entrepreneurs across the state before giving up. Anthem Capital no longer exists.
Squandered tax dollars
In an interview with auditors, Caren Wilcher, associate director of the West Virginia Economic Development Authority, blamed the program’s failure on lawmakers, and said that the agency lacked guidance on how to administer the funds.
If the law had required more than office space in West Virginia — like actual monetary investment in local companies — “it is likely the state would have experienced more positive outcomes,” state auditors noted in their report.
But the architect of the law, former governor Wise, strongly defended the law he championed after the auditors’ report was published.
“The plan was sound and reflected the need to attract high-tech companies,” he said in an interview with MetroNews.
That need remains. West Virginia routinely ranks at or near the bottom of states’ high-tech economies. It’s currently 49th on the Santa Monica think tank Milken Institute’s State Technology and Science Index, barely ahead of Mississippi. And the National Science Foundation ranks West Virginia 46th on a measure of venture capital activity relative to the size of the state’s overall economy.
Like Wise, Gov. Jim Justice also has a plan to diversify the state’s economy and attract high-tech businesses. This time, it involves bringing high-speed internet to the many, many areas of the state that don’t have it, which limits West Virginia’s ability to attract a young, highly-educated workforce.
To do that, Justice signed an executive order last year that removed guardrails on a state program that provides loan guarantees for companies that will build new broadband infrastructure. Previously, the program had hard caps on the size of the loans it could back.
It’s a boon to local companies like Bridgeport-based CityNet that are trying to prove their financial stability to the Federal Communication Commission in the hopes of nabbing tens of millions in federal subsidies.
And it’s being run by the West Virginia Economic Development Authority, the same agency that may have thrown out crucial financial records and that is now accused of “inadequate record-keeping” by state auditors for relying on Microsoft Excel instead of professional accounting software like Quickbooks to record transactions. (In a letter in response to the audit, Wilcher wrote that the arrangement had been approved by the agency’s auditors at the time.)
Perdue, the tipster, is no longer the state treasurer. A Democrat, he was voted out of office in the last election, and replaced by Republican Riley Moore.
Not wishing to miss a well-timed political opportunity, Moore has blanketed the papers and radio airwaves with promises to do better. “The days of squandering your tax dollars on shady deals and reckless investments are over,” Moore wrote in a press release announcing increased oversight of the EDA.
His office has helped draft legislation, to be introduced in the upcoming session, that would allow the state to scrutinize the agency’s financial records, including those related to the broadband loan guarantee program on which Justice had just lifted the caps.
“We are going to act like a backstop, to ensure something like this never happens again. Ever,” Moore later said on MetroNews’ Talkline.
West Virginians have heard such promises before. Moore’s grandfather, Arch Moore, was governor when the state passed the Super Tax Credit, a controversial economic development initiative and one of the targets of Wise’s reforms. Intended to attract a major auto plant, the initiative was ultimately a $1 billion giveaway to coal companies. The plant never materialized.
Few successes
Still, in the end, not all of the money allocated for venture capital loans went to waste. At least some of that $25 million did go to West Virginia companies. Many of them failed, but some succeeded — at least for a time.
The EDA said that the money supported 25 businesses and more than 400 jobs, but provided auditors with scant evidence of the claim.
ListHub was one of these companies. Founded in Morgantown in 1999, it is an advertising tool for real estate and sold a little over a decade later for $13 million. It now has eight employees, according to LinkedIn.
Charleston-based Mountaineer Capital was an investor in ListHub, and in turn — thanks to a $3.8 infusion into Mountaineer’s fund — so was the state.
Rudy Henley, a partner in Mountaineer, said that his fund returned some, but not all, of the state’s investment.
“It was an attempt to try to do something that didn’t work as well as everybody hoped,” he said in a phone interview. The firm has since shut down.
At the time, Henley said, the state lacked a “critical mass” of infrastructure to help entrepreneurs make headway. There wasn’t enough capital, enough expertise or enough companies working together, he said.
He pointed to an investment in an unnamed company that created a promising “sports product,” but never partnered with the right distributors to reach a large market.
Henley said that the startup ecosystem has improved substantially in the last decade, thanks to investment by the state’s universities and a bevy of new organizations that have popped up to assist budding entrepreneurs.
In the end, he thinks the state’s early, floundering attempts to kickstart that ecosystem — even if they failed — were worth a try.
“You have to get up there and take a swing to play the game,” said Henley.
“If you fail, get back up and do it again.”