Friday, February 13, 2009
by Brett Narloch and Jacqueline Dotzenrod
Executive Summary
The Centers of Excellence program was started in 2005 with the idea that each Center would become “a hub of research and development around which dynamic new businesses cluster.” Funding for the Centers was provided to four of the state’s universities in October 2005. Centers of Excellence are required to get a 2:1 match in funding. Each Center must find partners to help fund two-thirds of the program.
As part of the accountability measures built into the program, each Center is required to submit an annual functional review to update the taxpayers on how the Centers are performing.
A review of the 2007 functional reviews reveals that the Centers of Excellence program has failed to deliver on most of what it promises. The NDPC uncovered and has detailed many problems with the way that the reviews are completed, the amount of private sector cash that has been raised, the results of the program, and the general lack of accountability that exists within the program.
What is a Center of Excellence?
In 2005, Governor John Hoeven announced a Centers of Excellence program to create economic development across the state by partnering universities in North Dakota with private sector businesses. The partnership is supposed to be a two-way street. Universities get resources and expertise from businesses to train students for the “real world”. Businesses get employees trained in the specific areas that they require. Furthermore, new business ventures and new technologies would be created, fostering more high-paying jobs in North Dakota, which would in turn lead to graduates staying in North Dakota, and a more diversified and dynamic economy. Gov. Hoeven’s website declares that the concept is simple: “It we nurture a place where some of our best and brightest minds can find ways to commercialize their ideas into products, skills and services, we will create and attract new businesses. Those businesses will generate higher-paying, skilled jobs for our citizens, especially our graduates.”
Sixteen Centers had been approved for state funding, but two (UND – Biomedical Device Research and Minot State University – Great Plains Knowledge and Data Center) withdrew their applications before receiving any funding. There are currently fourteen Centers of Excellence in North Dakota. Three of them were approved directly by the legislature and do not have to meet some of the reporting criteria. The other eleven have been approved by the Centers of Excellence Commission, which was created in the 2005 legislative session. The Commission consists of members of the Board of Higher Education and the North Dakota Economic Development Foundation, none of whom are elected representatives. Thus far, the commission has approved $27.4 million in funding for the program, with another $25 million left to allocate.
Objectives of a CoE
According to Gov. Hoeven’s website, the objective of a Center of Excellence is to “research, develop and commercialize products and services to create good-paying jobs for the citizens of our state, especially our young people.” The statement is fairly vague; fortunately, Centers are required to fill out an annual review which has more specific objectives. They must document a 2:1 match, leverage additional funding, explain the benefits of the Center to the economy of North Dakota, promote the commercialization of new products and services, increase in R&D from EPSCoR, explain their timeline, foster & practice entrepreneurship, prove they can become self-sustainable, and several other items.
The North Dakota Policy Council has reviewed the eleven functional reviews submitted by the Centers, focusing on the objectives of the Centers.
Objective 1: Documenting the 2:1 Match
The Centers of Excellence are meant to be joint ventures between the colleges and the private sector partners. However, in many cases, matching dollars are put up by other public entities – either federal or local.
There are three ways an entity can contribute to a Center: give cash, in-kind, and in-lieu of cash contributions.
The private sector has provided 55 percent of the matching contributions. The remaining 45 percent of the match is coming from taxpayers through local and federal programs. While the required 2:1 match is being met, public money is being matched by more public money.
According to the Centers of Excellence applications, the matching entities (public and private) have yet to contribute $24.6 million of the $72.5 million promised.
Only 39 percent of all Centers of Excellence money is attributable to private sector partners.
Objective 2: Leveraging Additional Funding
Of the eleven Centers of Excellence, only three – NDSU Center for Advances Electronics Design & Manufacturing, NDSU Center for Surface Protection and the UND Energy & Environmental Research Center for Hydrogen Technology – have had any success with leveraging. The rest have not.
Objective 3: Benefits of the Project to the Economy of North Dakota
There are several benchmarks used when documenting the benefits of the Centers to the economy of North Dakota. One is the number of jobs created. According to the annual reviews, the Centers created 1,599 through the end of 2007. However, it is the Centers themselves that fill out the annual review forms. The Department of Commerce does not verify the number. Furthermore, it is nearly impossible in most cases to prove whether any new jobs created by the private sector partners were created because of the Centers. Private sector partners have an incentive to inflate the numbers, because they want the program to continue to receive funding. After all, it directly benefits them. The Department of Commerce has the same incentive.
Another benchmark is cost per job. Most Centers claim the number of jobs they create cost taxpayers less than $2 per job. However, a quick look at the formula used reveals a major flaw. Rather than simply dividing the cost of the program to taxpayers by the number of jobs created, they divide taxpayer cost by the number of jobs created multiplied times each job’s salary.
The big question is why salary is included in the equation. The true cost per job is not less than $2, it is $42,292, assuming the number of jobs created is accurate.
Objective 4: Promoting the Commercialization of New Products & Services
There are seven benchmarks used to measure whether the programs are commercializing new products and services. The majority of the Centers do not measure up to the program’s standards. Many of the answers given were vague, and some questions remained completely unanswered. The handful of straight answers reveals that the Centers help private partners get more taxpayer funding and claim to be primarily responsible for the startup or expansion of new businesses. Of course, few of their claims can be verified. Taxpayers cannot request records from private companies and the Department of Commerce requires no proof that the answers are correct.
The following is the list of benchmarks for objective four:
- Patents – Only the UND Center for Life Sciences and Advanced Technologies has a patent resulting from its research.
- Intellectual property royalties – Only the UND Center for Life Sciences and Advanced Technologies and the UND Energy and Environmental Research Center have generated any revenue as a result of their research.
- Increased small business innovation and research or small business technology transfer program activity – These are also taxpayer-funded programs. Only two Centers assisted partner companies in pursuing SBIR and SBTTP funds. American Crystal Sugar received a $299,000 SBIR grant and Agri ImaGIS submitted an application, but was denied.
- New activities – DSU developed a course in customized entrepreneurial leadership and a special communications course and offered them at no cost to employees of Killdeer Mountain Manufacturing. DSU and NDSU are collaborating on a pre-engineering program. NDSU partnered with an out-of-state company and received an RFID project from the federal government. UND mentioned that it was continuing to receive millions of dollars in taxpayer money and BSC declared that it was looking for more money to fund its activities.
- Knowledge-based companies resulting from this grant – VCSU claims that over 100 people worked at Eagle Creek by the end of 2007. Eagle Creek is a private company and their records are not available to the public. However, according to Valley Development Group Director Jennifer Feist, Eagle Creek was laying off employees in November 2008. NDSU provided assistance to two North Dakota companies that expanded – Appareo System and Pedigree Technologies. UND claims it is responsible for the startup or expansion of many companies including Laserlith Corporation, Raytheon, Microsoft, Ideal Aerosmith, and Lockheed Martin. Those claims cannot be verified because their records cannot be examined.
- New relationships – DSU, NDSU, and UND all cited relationships with private companies. VCSU created a 17-member Advisory Council to help identify IT talent needs for the Center.
- Enhancement of reputation – Not surprisingly, ten of the eleven answered that their university’s reputation had been enhanced by the Center of Excellence. It is not quantifiable and the Department of Commerce does not verify the claims.
Objective 5: Increase in R&D from EPSCoR
EPSCoR is a federal program funded by taxpayers. Only UND received R& D funding through this program.
Objective 6: Project Timeline
Seven of the eleven Centers were on schedule by the end of 2007. Four Centers cited various reasons why they were no longer on schedule, including frustration with private sector partners, legal issues, and competitive issues.
Objective 7: Foster & Practice Entrepreneurship
Lake Region State College claims that Centers of Excellence funding helped start up Verdi-Plus, allowed Agri ImaGIS to expand their product line, and Total Crop Farming Systems to expand its operations.
NDSU is a co-sponsor and facilitator of the NDSU’s Annual Technology Transfer and Entrepreneurship Workshop.
UND claims that Centers of Excellence funding has helped create three spin-off companies and bring in out-of-state companies.
Objective 8: Evidence of Self-Sustainability
DSU – The Strom Center will depend on three sources for funding: private sector revenue from fees and royalties for services provided and products developed, revenue procured through grant proposals to both public and private foundations, and funds raised from the communities in the region that directly benefit from the Institute’s economic development activities. The Institute expects that by Nov. 1, 2010, the Institute will generate a minimum of $150,000 in fees, royalties and/or grants. It is also expected that $150,000 will be raised from the communities being served. The COE grant funding will run out in October 2011. It is expected that the Institute will generate a minimum of $100,000 in revenue with another $75,000 in community support. $162,600 of the cash match from local private sector partners will be available after the grant is completed.
VCSU – Its goal is to be sustainable by 2010. The Center hopes to do this by identifying additional industry partners in Enterprise Software Applications to facilitate business expansion or relocation to North Dakota. Centers of Excellence grant funds are also being spent to help with name recognition, marketing of ICBS services by acquiring the domain name enterpriseuniversity.com, and retaining Flint Communications to develop brand recognitions and a website for “Enterprise University.” The courses developed will be offered to the public for a fee while program development is offered to private partners free of charge.
LRSC – In the original proposal, LRSC identified three elements that are crucial to self-sustainability:
- The DCTOA’s Steering Committee, which is composed of private sector members, is to guide the Center into the future as it responds to emerging market opportunities.
- The successful competition for federal and other awards.
- Development of royalty capability as new software products are brought on-line using financial resources and instructional and engineering expertise within the Center.
WSC – Training fees will be assessed to sustain this new program.
BSC – The center will offer programs and hands-on laboratory education and training in several energy technology areas. The funds required to sustain the facility will be derived from revenues and other sources generated through industry partnerships and government grants.
NDSU/AEDM – This center will be sustainable primarily through newly sponsored programs and short-term research activities from the private sector directly to work on its problems and product development research opportunities, the private sector directly as a sub-contractor on its prime contracts with the government or other companies and directly from the government where a private sector entity is an essential partner in the program.
NDSU/OD – In 2010, NDSU will begin releasing lines of canola to the industry in order to sustain this Center.
NDSU/SP – This Center intends to sustain its activities through a combination of new research sponsored by private sector partners, as well as government agencies, development and licensing of intellectual property to the private sector and continued testing and expert access capabilities.
UND/LS – The sustainability of this Center is based upon corporate partners and UND leasing space to other entities. Lease dollars from partners will pay off the debt service on the bond and loans.
UND/UAS – The sustainability of this Center lies in its vision to create a UAS Institute at UND. Personnel will assist in the development and implementation of commercialization business plans for technologies and marketing strategies for training and research programs. Funding is also being sought through the Grand Forks Economic Development Corporation and the Base Realignment Impact Committee. Other sources of future revenue include federal grants, training contracts, royalty income or licensing fees and additional private sector partners.
UND EERC – According to their review, the EERC has always been a self-sustaining and self-supporting entity within UND.
While most of the Centers have a plan to become sustainable, the fact that only a couple of them are currently earning revenue does not bode well for them. It must also be noted that the EERC might be self-sustaining largely because of taxpayer dollars.
Objective 9: Substantial Variations from the Application
According to the reviews, none of the Centers have varied substantially from their application.
Objective 10: Opportunity for Support and Collaboration among other Institutions of Higher Education
DSU is collaborating with NDSU on an engineering program. BSC envisions a strong relationship with UND and NDSU as a result of the program. NDSU is attempting to collaborate with the North Dakota State School of Science. UND sees potential for collaboration with Mayville State, NDSU, Minot State, and several out-of-state universities.
Objective 11: Opportunity for Support and Collaboration from the North Dakota Department of Commerce
The two most common replies to the question of whether there are opportunities for the Centers to collaborate with the Department of Commerce were requests for more financial assistance and leaving the question unanswered.
Objective 12: Tracking of Expenditures
VCSU and LRSC were the only two Centers that provided revenue and expenditure statistics.
Problems with Existing Accountability Measures
The Centers of Excellence program is neither accountable nor fulfilling its objectives. There are very few laws in the North Dakota Century Code to hold the program accountable. The Centers of Excellence Commission is tasked with overseeing existing accountability measures, using the staff and resources of the Department of Commerce, which has indicated to the North Dakota Policy Council that they do not verify what is being filled in on the functional reviews.
Each Center is required to submit an audit of expenditures to the Centers of Excellence Commission to ensure that the funds are being spent in accordance with the law. As mentioned earlier, each Center is required to submit a functional review detailing its activities. This review is not verified by the Department of Commerce.
Conclusion
The concept of the Centers of Excellence program is fundamentally flawed. While bringing together the best and brightest students and putting them into a partnership with private sector partners sounds good, it does not stand on strong principles. Each job created costs taxpayers more than $42,000 (assuming the number of jobs created is accurate), which is actually higher than the average salary of the jobs created, according to some of the functional reviews. But what about the “multiplier effect” when considering 1,559 employees are spending money in the economy? That premise for such a “multiplier effect” is faulty because it fails to account for the negative consequences of taking nearly $30 million out of the economy to fund the program. Furthermore, the types of programs being funded may or may not create the workforce needed for jobs in the future. For instance, consultants and industry experts often predict which industries will “take off” in the near-term. It must be understood that those predictions are just that, predictions. The program has no mechanism to retract should the industries being researched and invested in fail to be in demand.
Putting economic factors aside, the program also suffers from a lack of accountability. The functional reviews need to be verified and documented by the Centers to prove that what they are submitting to the state is true. Of course, the problem is further complicated because private sector partners are required to reveal very little information and the information that can be collected is not nearly enough to conclude that what the private sector partners are submitting is truthful or correct.
The Centers have, by and large, failed to achieve their objective. Very few products and services have been created, very few are on time, very few have received EPSCoR funding, and there has been very little noticeable impact on the North Dakota economy. Do the Centers need more time to achieve these goals? Perhaps, but many of the goals are not achievable. For instance, given the nature of the program, fundraising appears to be geared towards federal and local funds, not private sector funds. The program may also suffer long term from the fact that private sector partners could and perhaps will leave the state once the government funding dries up. Can any of the Centers be counted on to become self-sustaining when more than 60% of their current funding is from taxpayers?
The North Dakota Policy Council believes that these problems are serious, and ultimately fatal. Therefore, the Centers of Excellence program should be discontinued at the soonest time possible. At the very least, the Centers of Excellence Commission and the Department of Commerce need to provide better oversight and verify what each Center submits. In the meantime, no more funding should become available to expand the program while the current Centers are trying to prove that the program is worthy.