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 In Features July 2016

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The battle over House Bill 2 and its impact on North Carolina’s economy seems split between parallel universes. N.C. Commerce Secretary John Skvarla: “Our pipeline of prospects is chock-a-block full,” he says. “If we have been taken off some lists, you have to ask if we would have won anyway. Lots of good things are happening.”

Mac Holladay, a site-selection consultant who has led commerce departments in Georgia, Mississippi and South Carolina: “It’s one of the most serious disasters I’ve seen in 40 years in the business. When you have companies that are not even allowing North Carolina to be on a list for an expansion or a new facility, you are entering a space in which the state has never been.”

North Carolina’s economy is on a roll in the urban areas that account for more than two-thirds of population and production. Our annual listing of the largest job expansions (page 54) highlights that growth, supporting Skvarla’s claim that North Carolina’s economy has expanded almost twice as fast as the U.S. average in recent years. Home sales are robust, apartment rents are soaring, cranes fill the skies in center-city Charlotte and Raleigh, and help-wanted signs are luring software developers, construction workers, restaurant servers and others.

Yet that momentum is at risk because of a debate over whether gay, lesbian and transgender people should be provided explicit nondiscrimination protection. Most of the two dozen business and political leaders interviewed for this story agree on this: Both sides of the HB2 debate messed up. As former N.C. State Budget Director Art Pope put it, “Charlotte overreached, and the General Assembly overreacted.”

To recap, Charlotte’s City Council voted to join 17 of the 20 largest U.S. cities in adding gay and transgender people to its nondiscrimination ordinance, fulfilling a campaign pledge by Mayor Jennifer Roberts, who took office in December. The move followed warnings from Gov. Pat McCrory and state lawmakers that the new rule would enable transgender people — who make up an estimated 0.3% of the population — to visit the bathroom of their current status, raising safety and moral concerns. In simpler terms, a man who transitioned to a woman could use a woman’s bathroom in Charlotte. Not a good idea, the governor and other critics said.

The council, made up of nine Democrats and two Republicans, passed the bill anyway. “It had been discussed in Charlotte for two or three years,  and it was the right thing to do,” says Charlotte City Councilman Al Austin, the first openly gay male elected to the board. The General Assembly responded in March with HB2, overturning Charlotte’s ordinance and setting up a statewide class of nondiscrimination that does not include sexual orientation or gender identity.

While more than two dozen other states also don’t provide such protections, North Carolina’s action fueled international outrage over perceived intolerance. Key North Carolina CEOs including Brian Moynihan, Jim Whitehurst and Robert Niblock denounced the state’s action, followed by large chambers of commerce who were dismayed when PayPal and Deutsche Bank suspended projects that would have added 650 jobs, and an unnamed tech company promising as many as 1,000 jobs cut Raleigh from its list of potential sites. Inquiries about downtown Charlotte office space plunged 90% from the previous year’s level, according to an official with leasing giant Jones Lang LaSalle Inc. A PR nightmare ensued: The issue received nearly 8 billion internet impressions in the month after the law’s passage, according to the Greater Raleigh Chamber of Commerce.

“The overwhelming reality is that it is clouding out everything else great that is happening there,” Holladay says. “We all know that the No. 1 issue for business today is talent, so telling people that you don’t really want them is a battle you don’t want to fight. And the business community has long memories.”

Efforts for a resolution before the legislature adjourns continued at press time, though a compromise is unlikely, according to Pope and others familiar with the negotiations. Skvarla predicted the controversy wouldn’t be resolved until the November elections, when either his boss, McCrory, is re-elected or replaced by Democrat Roy Cooper, the state’s attorney general, who advocates repealing HB2. Skvarla depicts North Carolina as a “happy place” with great weather, an excellent university system, improving air and water quality, and a balanced regulatory environment. “We want to be sensitive to everyone. But we didn’t get to be a $500 billion economy by being bad people.”

Skvarla says anger over the crisis should be directed at the Human Rights Campaign, the Washington, D.C., nonprofit that promotes LGBT rights and has condemned HB2. “I call them Seal Team 6; they are that good,” because of their success in creating what Skvarla calls “a diversionary, Vesuvian volcanic eruption … That isn’t a spontaneous occurrence. It’s been a brilliantly organized campaign.”

HRC would be ineffective without backing from major employers, who face negative headlines and potential boycotts if they act contrary to the group’s positions, Skvarla says. Corporation CEOs “don’t want to be the one that sticks his head out of the foxhole.”

The debate reflects a well-designed political strategy, says Warren Smith, a former marketingmanager for PricewaterhouseCoopers LLP and associate publisher of World magazine, an evangelical Christian-oriented nonprofit based in Asheville “The HRC has targeted big firms for more than 25 years, creating a myth that corporate America is with them. [The accountants] would receive questionnaires, and heaven forbid if Arthur Andersen got a better score.”

The alternative view, stated by Attorney General Loretta Lynch while outlining the Justice Department’s lawsuit to block HB2, is that the law is “state-sponsored discrimination” against vulnerable citizens. ”What this law does is inflict further indignity for a population that has already suffered far more than its fair share,” said Lynch, a North Carolina native. “This law provides no benefit to society, and all it does is harm innocent Americans.”

The business backlash against HB2 “underscores how much of corporate America has embraced the urban consensus that cosmopolitan culture values are now indispensable for attracting talent,” Ron Brownstein, political director of Atlantic Media Co., wrote after visiting Charlotte in June. To compete against other cities, “we’ve got to show that we are welcoming, that we are inclusive and that we are going to treat everyone equally,” Mayor Roberts said at a meeting sponsored by Brownstein’s Atlantic magazine.

Phone calls and emails seeking comment from HRC and its North Carolina affiliate, Equality North Carolina, were not returned. “Dozens of HRC staff have been on the ground [in Asheville, Charlotte and the Triangle], mobilizing pro-equality supporters and talking with voters about the dangerous implications of this harmful legislation,” according to a June press release.

Caught in the crossfire are the state’s economic developers, who must show deference to both North Carolina’s conservative lawmakers and top business leaders. “The economic impact has been real. It may have been a human rights issue initially, but now it is a business issue,” says Ronnie Bryant, president of the Charlotte Regional Partnership, which promotes 16 counties. Developers’ frustration largely centers on the unwillingness of the two sides to compromise, he says. “The folks on the left like the HRC are getting what they want from all of the publicity, while the supporters of HB2 are getting what they want because conservatives are rallying around them. So there is no pressure to compromise.”

While chambers in cities including Durham, Charlotte and Raleigh favor reforming HB2, their ability to influence suburban and rural lawmakers has proven ineffective. “Bob Morgan and the great staff at the Charlotte Chamber are crippled,” Holladay says. “The same with Tim Guiliani in Raleigh and other metros like Greensboro and Winston-Salem. What kind of relationships are they supposed to have with the state government now?”

McCrory and N.C. politicians are standing up to big-business pressure because they represent their constituents’ views, including a vast majority of Main Street business owners , says John Rustin, president of the N.C. Family Policy Council, a Raleigh nonprofit that has rallied support for HB2. “From an intensity standpoint, it is about as high as I’ve ever seen it,” he says. “For every corporate executive who has expressed concerns about the legislation, there are thousands of others who are very happy to be in North Carolina.”

Roberts may be the protagonist in the controversy because of her outspoken support for the Charlotte ordinance, though she doesn’t vote except in the case of a tie. She has consistently pushed for HB2’s repeal, frustrating efforts for a compromise brokered by state and local chamber officials and the politicians, according to people familiar with the matter. “There have been proposals to her that would have been palatable to 99% of the legislature and would have moved us in a way that real progress could be made,” says an N.C. lawyer close to House speaker Tim Moore and Senate President Pro Tem Phil Berger. (He asked to remain anonymous because of fears of reprisals.) Several Charlotte city councilors met with Raleigh lawmakers about a resolution, but two backed off under pressure from Roberts and the HRC, says Julie Eiselt, a Democratic city councilwoman who voted for the ordinance.

Roberts’ response: HB2 supporters haven’t explained what they would give up specifically in return for Charlotte’s compromise. At the invitation-only Atlantic event, Roberts criticized rural lawmakers for imposing their will on North Carolina’s cities. “There are some parts of the state where things don’t change in decades,” she says. “My worry for America is that we have states that are holding our cities back.” She hasn’t talked with McCrory since April, she told Time Warner Cable News on June 17.

The fracas has spurred rarely seen raw anger from both sides. Consider this excerpt from an email written by UNC Chapel Hill Law School Professor Judith Wegner to N.C. Rep. Dan Bishop, a Charlotte lawyer who co-sponsored HB2: “So, for what it is worth, you have created a state of hate, and I regret that I ever knew you,” says Wegner, a former dean who is resigning next year after 36 years at UNC. “If there is any kind of retirement event on my behalf, I will not hesitate to say how heartbroken I am about students I once taught who have since created a state of hate. You will be first on my list of students who have disappointed me and who have led the way in creating a state of hate for partisan purposes.”

Wegner declined to comment. A conservative using the term “state of hate” would have been condemned, Bishop says. “Rest assured that Professor Wegner fears no consequences, whatsoever.”

With lagging expectations that HB2 will be modified this year, increasing attention will be paid to North Carolina’s ability to attract big new entrants or existing employers’ expansions. One key player may be National Basketball Association President Adam Silver, who threatened to pull the league’s all-star game from Charlotte next year unless HB2 is modified. The move could cost a potential loss of $60 million in direct spending and create terrible international PR for North Carolina.

But the parallel universes reappear, with Skvarla showing little concern. “At his last press conference, Mr. Silver was singing a bit of a different tune,” he says. “My sense is the NBA is neutrally noncommittal.”

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Dimensional-Fund-AdvisorDon Beaver