Do the pieces still fit?

In some ways, Carolina Ingredients Inc. is a petunia in an onion patch, perched in an industrial park next door to a company that distributes nuts and bolts and across the street from a plant that makes rollers for assembly lines. On a sign out front, its logo, a tricornered burst of red, yellow and blue, is cheery, but what sets it apart are the smells — allspice, nutmeg, sage, chili peppers, ginger and scores of other scents. Customers can order 5 pounds or 500,000 pounds of seasonings. “We supply the Fortune 500 companies you see on grocery-store shelves,” President Doug Meyer-Cuno says, “but also mom-and-pop operations.”

In late 2009, the company moved and expanded, with about 60,000 square feet now under its roof. The $5 million upgrade includes a research-and-development lab with quartz countertops infused with antimicrobial agents. Employment increased from 24 to 34. Businesses such as this are the soul of a state’s economy. Of the 380 that have received $83 million since 2001 from the One North Carolina industry recruiting and expansion fund, about 60% had fewer than 100 employees. Carolina Ingredients’ business might be spices, but it’s the kind that entices recruiters — progressive, prosperous, growing.

It’s also in South Carolina. How it came to leave Charlotte shows one of the flaws in the Tar Heel State’s front-line system for recruiting and retaining business — the public-private North Carolina Partnership for Economic Development. Crafted on the principle that the state’s cities and counties are too small to make much of a splash in a global market competing for business, it divvies them up into seven regional public-private partnerships. “We had 100 counties and about 500 municipalities competing against each other,” says Dave Phillips, the High Point businessman who was North Carolina’s secretary of commerce from 1993 to 1997 and is considered the father of regionalism in economic development. “We needed to get people to work together.’’ Few question the premise, but two decades on, many question whether the partnerships are fulfilling the mission he and others envisioned for them.

Meyer-Cuno didn’t want to leave North Carolina. He started his company in 1990 in Mecklenburg County and grudgingly accepted what he calls “the maze you have to go through” to do business in Charlotte. He expanded once but balked when he wanted to do it again and Mecklenburg economic developers turned him down for $33,000 in property-tax breaks. Mark Farris, economic developer in neighboring York County, was waiting in the wings. Among the offerings he dangled: abating property taxes for five years.

York and three other South Carolina counties are members of the 16-county Charlotte Regional Partnership, in which they supposedly work together to attract business and industry from elsewhere — not each other. In fiscal year 2008-09, the latest for which figures are available from the N.C. Department of Commerce, the Charlotte Regional Partnership got $638,775 of its $3 million budget from the N.C. General Assembly. The remainder came from member cities and counties — most of them in North Carolina — private businesses and grants. York County kicked in about $50,000. The state of South Carolina contributed nothing. Despite the loss of this company and others, including 500-employee Continental Tire North America in 2008, partnership officials say such defections are inconsequential, totaling less than 1% of Mecklenburg County’s tax base. Farris’ take: “If the phone rings, we answer it. We don’t come up there and put up billboards.”

Even when there’s no state line to contend with, companies routinely pit partnership members against each other. Take Round Rock, Texas-based Dell Inc., recruited to the Triad in 2004 with the promise of receiving more than $300 million of state and local incentives over 15 years. Greensboro offered $5.3 million, with Guilford County upping the ante to $7.1 million, then Davidson County raising it to $23.1 million before the duo of Winston-Salem, with $18.9 million, and Forsyth County, $14.8 million, prevailed. “Not only do executives play the game,” Phillips says, “they hire firms that specialize in it.” All this occurred despite warnings by industry analysts that U.S. computer manufacturing was an endangered species. Five years after the plant opened, Dell shut it down last year, leaving on the table most of the incentives it won. “Dell shows how hard it is to pick winners,” says Donald Jud, professor emeritus at UNC Greensboro’s Bryan School of Economics. “Government folks would probably be better advised to stick to their knitting and do things they know about.”

If partnerships can’t prevent internal strife, what do they do? And is it worth the taxpayers’ hefty investment in them? That’s what John Turcotte asked. He’s director of the Program Evaluation Division, the General Assembly’s nonpartisan watchdog agency, which in 2008 concluded that the partnerships couldn’t fully explain what they do, despite having received more than $65 million from the state since legislators established the Partnership for Economic Development in 1997. His agency’s study cited a lack of accountability and performance standards. “The legislature asked us to see if this program was producing results. We couldn’t find any.”

Supporters say such criticism is misplaced and largely due to the necessarily secretive nature of industry hunting. “Everybody from the Bureau of Labor Statistics to publications like Forbes, USA Today and Site Selection magazine indicate we’re making significant progress in job creation,” says Deputy Secretary of Commerce Dale Carroll, who for 12 years was CEO of AdvantageWest Economic Development Group, one of the seven partnerships. “There’s a lot of third-party validation.” Charlotte Regional Partnership CEO Ronnie Bryant agrees: “The opinion of our stakeholders is at an all-time high. The Charlotte partnership was named one of the nation’s top 10 economic-development organizations in 2009 by Site Selection, and 2010 looks like it’s going to be a decent year too.”

Site Selection, the bible of industry hunters, has ranked North Carolina’s business climate as the nation’s best in nine of the last 10 years, and Forbes named it third-best for business last year. According to the governor’s office, the state landed commitments for 30,000 jobs and $5.6 billion in investments in the 12 months that ended in September. Carroll says the Partnership for Economic Development has acted on some of the criticisms, adopting accountability standards, for example, and the Department of Commerce formally joined the group as a full member in December, some insiders say to take a tighter rein.

Critics claim the accolades attest to the state’s attractive business climate, not the prowess of the partnerships. “They haven’t broken down barriers and made the system more efficient,” says Michael Gallis, a Charlotte architect who has advised the U.S. and Canadian governments and cities such as San Diego and Orlando, Fla., on growth and economic development. Like Phillips, he was an early proponent of regionalism and the partnership system. Now, he says, “we’re back to square one.”

German, Japanese, Dutch — the accents blended. Flags of more than 100 counties fluttered on downtown streets as visitors crowded High Point for the International Home Furnishings Market, now formally known as The High Point Market. In the late 1980s, more than 50,000 buyers browsed furniture for most of a week, twice each year. They brought millions of dollars with them, but the city didn’t have all the retail resources it needed to relieve them of some of it. That, indirectly, gave root to the partnership system. “We had no mall in High Point,” Phillips recalls, “and a major one wanted to come.”

When environmental concerns surfaced, he rallied businessmen to pay for a study of the mall’s impact. Elected officials and others joined, making it a public-private effort. “Greensboro was thinking along the same lines, as was Winston-Salem. We started meeting and calling ourselves the Piedmont Triad Partnership.” That was in 1991. Similar movements were under way in and around Charlotte and the Triangle. In 1993, Democrat Jim Hunt, who had pushed regional cooperation in his native Eastern North Carolina, took office for the third of his four terms. He appointed Phillips as his commerce secretary.

They brought a hodgepodge of organizations, some of which were private nonprofits and others chartered as state commissions, under one blanket, creating the seven partnerships. In 1997, legislators set up the North Carolina Partnership for Economic Development, taking advantage of a federal tax law that lets such organizations meld private donations with public money to recruit business. Phillips envisioned the system as a mall, not merely giving regions the bulk they needed to catch the attention of site-selection consultants but making shopping easier — one stop could point a prospect to which member county or city had the needed infrastructure, workforce, schools or market demographics. But after he stepped down as secretary in 1997, the system took on a life of its own. “It’s turned into just one more large, ineffective agency,” says state Sen. Ellie Kinnard, a Carrboro Democrat who is a critic of state business-recruiting techniques and financial incentive programs. “Sadly, it’s just another bureaucracy and example of our lack of accountability for state spending.”

Nourished by public funds, the partnership system has mushroomed into one of the largest players in a state where recruiting industry has become an industry unto itself. Collectively, the partnerships have more than 60 staff members. At the same time, the Department of Commerce maintains seven regional offices — one in each region — staffed by more than a dozen recruiters. That’s in addition to the department’s core recruiting staff and specialists in Raleigh. Most of the state’s counties and nearly all larger cities have their own economic-development agencies, on top of scores of booster organizations such as chambers of commerce.

One problem the partnerships have is that each county had to join one, and it wasn’t always a good fit. “The state has 100 counties,” Gallis says, “and they didn’t do a study of economic regions.” Groups of counties, some of them uneasy allies at best, are expected to present a unified recruiting front, even if they have little in common — economically or even geographically.

In the AdvantageWest region, on the hilly streets of the touristy Cherokee County town of Murphy, license plates from neighboring Georgia and Tennessee sometimes outnumber those from North Carolina. More than 270 miles and a five-hour drive away, the Alleghany County town of Sparta anchors the northern end, surrounded by Christmas-tree farms and, some local businessmen say, with more economic ties to southwest Virginia than North Carolina. In between is Asheville, hub and home of AdvantageWest, with its industrial base, tourism and budding high-tech sector. In the Piedmont Triad Partnership, the Surry County town of Mount Airy — the model for television’s fictional Mayberry — and, more than 100 miles to the southeast, forested Montgomery County, with its sawmills and sleepy county seat of Troy, are lumped with the fast-paced medical and science sectors of Winston-Salem and global technology providers such as RF Micro Devices Inc. in Greensboro. “The regions,” Gallis says, “instead of reflecting economic reality are based on political logic — or maybe I should say illogic.”

Disparity can lead to tension. Scott Millar is president of the Catawba County Economic Development Commission. Two counties removed from Mecklenburg, it’s a member of the Charlotte Regional Partnership. “In most cases, it makes sense for us to hitch our star to Charlotte,” he says. But after a string of successes in attracting telecommunications companies to the Catawba Valley, “there was all this gnashing of teeth in Charlotte about not getting manufacturing jobs there. At the very same time, there were multimillion-dollar high-rises, apartments and 30- to 50-story residential towers going up all over center-city Charlotte. I thought, ‘Guys, you can’t have everything.’” In the other direction, 50 miles east of Charlotte, lies Wadesboro, county seat of Anson. Though it’s also a member of the partnership, the town lies on the edge of the Sandhills, with a population estimated by state planners in July 2009 at 5,489, compared with Charlotte’s 711,349, and an average household income less than half that of the Queen City.

Other partnerships were built around little more than an idea. The North Carolina Global TransPark Region, based in Kinston, covered a 13-count swatch of Eastern North Carolina extending nearly from Raleigh’s eastern suburbs to the coast. Its identity grew out of a proposed air-industrial park that, despite millions of dollars in state and federal money, languished until Wichita, Kan.-based Spirit AeroSystems Inc. decided in 2008 to build a $570 million plant there. Its slow start didn’t stop lawmakers in 1994 from authorizing a $5 annual license-tag fee to support it, which sparked animosity in the partnership’s outlying counties. In 2001, the name was changed to North Carolina’s Eastern Region — not to be confused with the Northeastern and Southeastern regions, which flank it. “We’ve still got silly signs — ‘Entering the Global TransPark Zone’ — stuck up all over Eastern North Carolina,” says Don Carrington, a former state-government economic researcher and now a vice president of the Raleigh-based John Locke Foundation, a conservative think tank often critical of incentives and the state’s recruiting. “The state wanted to force everyone into a region, and then it heavily funded some of them. It sounds nice and neat, but that’s not the way marriages and associations work.”

In 2008, Carrington, also associate publisher of the foundation’s Carolina Journal monthly newspaper, became the catalyst for a scandal that further scarred the reputation of the partnership system. It had nothing to do with geography.

Mixing public and private interests can leverage private dollars, but the practice is loaded with potential pitfalls. In 2005, bundled against the November chill, country singer Dolly Parton clutched a microphone and snuggled against brother Randy and two sisters. Thousands cheered as they belted out “I Saw the Light” at the groundbreaking of the Randy Parton Theatre in Roanoke Rapids, which backers predicted would turn the city into an entertainment mecca and help fill economic chasms left by losses in textiles and other industries. Carrington was in the crowd but not cheering. “I had a gut feeling it wasn’t going to work.”

He went on to uncover documents from North Carolina’s Northeast Commission showing that Rick Watson, the partnership’s president and CEO who had recruited Randy Parton, was also on the entertainer’s payroll (cover story, September 2009). The city later handed Parton a $750,000 settlement and sent him packing after he allegedly spent thousands of dollars of public money on personal trips, liquor and clothes, then showed up drunk for a performance. Now Roanoke Rapids holds the bag for a $21.5 million note on the mostly idle theater. Left behind was a tangled web of apparent conflicts.

As secretary of commerce, Jim Fain was a member of the Northeastern Commission’s board while Watson was assembling the deal and responsible for meting out the $1.4 million in annual state funding to the commission. Fain says he didn’t attend meetings and had no knowledge of Watson’s role with Parton. Other partnership directors included the mayor of Roanoke Rapids, who signed the note on the city’s behalf, a county attorney who simultaneously did legal work for Parton, a county tourism director whose husband later went to work for Parton and a Manteo developer who gave Parton $50,000 to become a “development partner.”

Watson was forced out, but no criminal charges were filed. “I think prosecutors saw this as somewhere between a public-corruption scandal and a business deal gone bad,” Carrington says. There were lingering consequences, though. “For every dollar a citizen of Roanoke Rapids pays in property tax, 60 cents goes to pay off debt on the bonds for the Randy Parton Theatre,” says Robert Orr, a former state Supreme Court justice and now director of the North Carolina Institute for Constitutional Law, which has unsuccessfully sued to block state incentives to Dell, Google and other companies. Turcotte, who directs the legislature’s watchdog agency, says the episode underscores an underlying weakness in the system. In one five-year period it studied, his staff found partnerships had spent nearly $70 million, including some $40 million from the state — 51% of their total budgets — $4 million from the federal government, $5 million from cities and counties and $13 million from private businesses. Officially, though, the state’s role with the partnerships is murky and its control loose. The Department of Commerce defines them as “partner agencies.”

“They argue that they give out brochures, do consultations with businesses and coordinate recruiting with local jurisdictions and chambers of commerce, but there’s nothing you can sink your teeth into, so far as what kind of return we’re getting for the public’s money,” Turcotte says. “They can account for how they spend the money but not the results.” The fuzzy business model gives auditors headaches. “We got into some operational issues on how these districts were governed. They don’t want to call themselves state agencies. They want to operate without purchasing controls. But they’re receiving state money. If they’re going to be private nonprofits, they ought to be set up that way. They had lots of disagreements over whether you could measure effectiveness. We said, ‘Sure you can. You can measure whether jobs were created as a result of your actions, whether they were retained, the quality of the jobs, customer satisfaction.’”

The partnership system, however, is popular with many of the recruiters who are members. “If we thought we weren’t getting our money’s worth, we wouldn’t be paying to be a member,” says Donny Hicks, director of the Gaston County Economic Development Commission. “When they have a prospect that fits into our county, we get the lead from them. That’s why we’re members — to get business leads.”

That’s why partnerships are misunderstood, some executives say. “We’re not deal closers,” the Charlotte region’s Bryant says. “Our primary measure is how many quality projects we produce for our communities to compete for. Our job is to find deals.” Once leads are established, he adds, the partnership steps back and its members scramble for them. But, all the while, the partnership works to tamp down bidding wars and infighting — a process Bryant calls managing the competition. “We don’t just put the counties in a circle, throw the project in the middle and let them fight over it. But let me make it clear: We do not discourage a community from going aggressively after a project.” Adds Hicks, “There’s not as much infighting here as in the Triad. We tend to compete on the basis of our assets, and most projects kind of shake themselves out to one or two locations.”

The public-private business model has other benefits, proponents say. It stretches recruiting money. In Charlotte, a $25,000 annual donation buys the CEO of a private company a seat on the partnership’s board of directors. In its fiscal year that ended in June 2009, the private sector pumped in about $1.7 million — 55% — of its budget, compared with about 45% from state and local sources. Money was still tight. The partnership sliced administrative costs, including Bryant’s compensation, which, according to Internal Revenue Service reports, dropped from about $332,845 in fiscal 2009 to about $286,000, including insurance and other benefits, in the year that ended in June 2010. His total compensation for the current fiscal year, including benefits, will be about $318,000.

Could more downsizing and budget cuts be in store for the system? As 2010 drew to a close, a spokeswoman for Gov. Beverly Perdue said it was unclear how partnership funding would fare in the governor’s 2011 budget. The General Assembly’s new Republican leadership — House Speaker Thom Tillis of Mecklenburg and Senate President Pro Tem Phil Berger of Rockingham County — refused to discuss industry recruiting or its funding. But Orr, for one, predicts tougher sledding. “The new majorities in both houses,” he says, “will look with a little more jaundiced eye at the system, certainly considering the budget shortfalls they’re facing. There’s so much incestuous back-scratching and self-promotion going on in these partnerships, it seems to me we should go back to where the government recruited industries through traditional mechanisms — ‘here’re the sites available, here’re the utilities, here’s the quality of life, the rate of property taxes, this is a nonunion state …’”

Gallis recommends “re-engineering” the system. “The regions concept is fine, but step one is going back, thinking in terms of economic markets and submarkets and basing regions on economic reality, not political expediency.” Phillips, who was U.S. ambassador to Estonia from 2007 to 2009, would go further — perhaps beyond the scope of the partnerships. He favors national legislation prohibiting incentives races and bidding wars between states, which would lessen and possibly eliminate the role of many recruiters. “Our state is so good at economic development — and our resources and assets are so good, compared to other states — we’d come out way ahead.”

The view from within the system, though, is radically different. “I’d like to see more resources come into the partnerships,” says Bryant, who adds, however, that he would also like to see them “more closely aligned” with the Department of Commerce. Bryant could be batting .500. The recent move by the Commerce Department to join the Partnership for Economic Development — Commerce Secretary Keith Crisco says it will enable the department “to work cohesively” with the regional partnerships — could signal the closer role Bryant wants, but few expect the system to receive more money in the midst of a budget crisis.

For some business owners, the answer no longer matters. In a South Carolina industrial park not far from the state line, Doug Meyer-Cuno has found a home for his growing business. “As an owner, when you’re trying to expand, you’ve got enough on your plate already. Here we’ve found a county, an environment that was more welcoming and receptive. Manufacturing isn’t sexy. It’s kind of grunt work. But no state can survive without it for the long term.”