Come May 4, Ohio voters will decide whether to pump $700 million more into the state's Third Frontier prorgam to extend it four years beyond its scheduled expiration in 2012. Supporters see Third Frontier as the state's best hope for moving from the smokestack era to the information age. Critics call the program "corporate welfare." They question the wisdom of taking on more debt when Ohio's budget faces a multibillion-dollar shortfall next year.
| Third Frontier program |
CLEVELAND, Ohio -- More than a half-billion dollars has been spent. Some 55,000 jobs have been supported and 637 businesses and projects helped.
But ask someone on the street, "What is the Third Frontier program?" and he'll probably scrunch up his forehead, scratch his head and walk away.
A feverish election campaign is trying to change that. Come May 4, Ohio voters will decide whether to pump $700 million more into Third Frontier to extend it four years beyond its scheduled expiration in 2012.
How Ohio pays for
the Third Frontier
Here are the sources and financing costs for the current Third Frontier program and its proposed renewal, which is on the May 4 ballot.
Current 10-year, $1.4 billion program
â¢$500 million bond issue. Fifteen-year payback on general-obligation bonds will total $639 million. Covered by state's general revenues.
â¢$500 million bond issue. Twenty-year payback on higher education bonds will total $752 million. Covered by general revenues.
â¢$183 million. From state's settlement with tobacco companies.
â¢$150 million. $15 million a year for 10 years, from general revenues.
â¢$100 million bond issue. Twenty-year payback on Innovation Ohio bonds will total $174 million. Covered by excess liquor profits.
Four-year extension on May 4 ballot
â¢$700 million bond issue. Fifteen-year payback on general-obligation bonds will total $917 million. Covered by general revenues.
SOURCES: Ohio Department of Development; Ohio Office of Budget and Management
Supporters say few issues in recent years have been as important to Ohio's economy. They see Third Frontier as the state's best hope for moving from the smokestack era to the information age.
The program's grants seed emerging technologies, companies and products with high commercial potential. The goal is to help them attract other capital and move more quickly to market.
A legion of elected leaders, development pros and businesspeople -- from Fortune 500 executives to entrepreneurs like Andy Sherman -- back the proposal, Issue 1 on the ballot.
Sherman, chief executive of MesoCoat Inc. in Euclid, used a Third Frontier grant to move his patented, high-tech coating for airplane parts closer to market. He expects his 20 employees to triple by next year.
But Third Frontier's passage is by no means guaranteed.
Critics call the program "corporate welfare." They question the wisdom of taking on more debt when Ohio's budget faces a multibillion-dollar shortfall next year.
And Ohio's black legislators are unhappy that so few minorities hold the jobs that Third Frontier has created.
With just three weeks until the election, early voters are already deciding the fate of this immense, anonymous program. People on both sides of the issue agree on one thing, though: It's time for Third Frontier to move into the spotlight.
What is the Third Frontier?
In the Statehouse, Republicans and Democrats alike hailed the multifaceted program and voted by wide margins in February to put the bond issue on the ballot.
Every major chamber of commerce in Ohio, including the Greater Cleveland Partnership, supports the issue, as does the Ohio Farm Bureau, the voice of Ohio's powerful agriculture industry.
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View full sizeAdam Sorkin, director of research and development for Arteriocyte Inc., works with the Cleveland company's Magellan system which produces a concentrate rich in stem cells. The company, which is developing a stem cell treatment for heart attack victims, has benefited from the state's Third Frontier program. But most Ohioans weren't even aware of the program as supporters began their Issue 1 campaign in February.
The first attempt to pass a Third Frontier bond issue failed in 2003. Voters approved a $500 million bond issue in 2005, when it was paired with a larger public works program.
"It's more borrowing and more debt" at a time when Ohio faces a budget deficit, said opponent Thomas Brinkman, a Republican and former Ohio House member who is running for county auditor in Hamilton County. "We just can't afford it. The state has to start trimming back, and there's no better way to start than to vote no on Issue 1."
Supporters say Ohioans can't afford not to vote for it.
Through 2008, Third Frontier grants, matching dollars from grant recipients, and follow-on investment from state universities and agencies totaled $681 million, an outside analysis showed.
The spending rippled a $6.6 billion impact into Ohio's economy, according to the analysis by SRI International, a nonprofit research institute in Menlo Park, Calif.
That means each dollar spent by the state spun nearly $10 into the economy -- well beyond the state's goal of a $3.50 impact for every dollar spent, state development officials said.
Through the Third Frontier program, Ohio "has made a strong statement that the path to economic prosperity is to grow our own businesses, our own products, our own services," said Eric Fingerhut, chancellor of Ohio's public universities and chairman of the commission that oversees Third Frontier. "We think we have the entrepreneurial instincts, innovative talent and research skills to create those new businesses and create jobs."
The four-year renewal means more debt for Ohioans. But the burden is not that great, state officials said.
Annual debt payments top out at $92 million in 2018. That's less than one-third of 1 percent of Ohio's general revenue and lottery profits that year, state projections showed.
"Ohio cannot afford to lose the Third Frontier because it is a . . . cornerstone of Ohio's long-term economic growth strategy," Amanda Wurst, spokeswoman for Gov. Ted Strickland, said in an e-mail. "And renewing the Third Frontier will ensure these important investments continue as Ohio emerges from the global recession."
A way to promote high tech
Third Frontier is regarded as the greatest legacy of former Gov. Bob Taft, who started the program in 2002.
Ohio's economy expanded first under agriculture, then manufacturing. High technology across Ohio's most promising sectors -- such as advanced energy, biomedicine and advanced materials -- would be Ohio's "Third Frontier" of growth, Taft said.
Job numbers derived
from statistical analysis
Ohio's Third Frontier has created 48,000 jobs, supporters say.
Well, sort of.
That number is by no means a head count. It's more like an educated projection, based on two sources.
One is a count of created and retained jobs, from reports submitted by companies, universities and others receiving Third Frontier grants.
The other source is economic modeling of the impact as Third Frontier spending rippled through the economy.
Third Frontier critics have not made the jobs claim an issue. But it's interesting to see where the number comes from.
The Ohio Department of Development hired SRI International, a nonprofit research institute in Menlo Park, Calif., for an independent review of the program's impact.
SRI and its partner, the Georgia Institute of Technology, employed widely used software -- known as IMPLAN -- to gauge the economic impact of Third Frontier's spending from 2003 to 2008, totaling $403 million.
A researcher plugged an array of statistics from Third Frontier into the IMPLAN model, including the reported number of new and retained jobs (7,727 at the time), new product sales and investment in construction and equipment.
In all, Third Frontier's economic activity resulted in 41,000 jobs through 2008, SRI reported.
Most of those jobs resulted from two levels of spending.
One is what economists call "indirect" spending. An example is a company that expands thanks to a Third Frontier grant and hires a marketing consultant or an intellectual-property lawyer.
Jobs result from another ripple of spending that's even less direct. An example is a new worker at the expanded company patronizing a local restaurant or supermarket, thus supporting jobs at those enterprises.
Last year, the Ohio Department of Development updated SRI's analysis to account for another half-year of activity.
That included a new job count of 8,527, with 6,086 jobs created and 2,441 retained.
In all, economic activity from Third Frontier spending resulted in 48,000 jobs through last June, according to the state's update. A more recent update, released just weeks ago, said the spending had resulted in 55,000 jobs through 2009.
Georgia Institute of Technology researcher William Riall, who did the IMPLAN analysis, said he's not troubled that Third Frontier supporters say the program "created" 48,000 jobs, even if a portion were actually retained jobs and most jobs resulted from spending not directly related to Third Frontier.
But he does have a preferred term for Third Frontier's relation to those 48,000 jobs.
"I would say that 'supported' is a better term," Riall said in an e-mail, "because it is a combination of people keeping jobs they would have otherwise lost and new jobs that didn't exist before."
-- Tom Breckenridge
Unfortunately, the nondescript "Third Frontier" brand reflects nothing about the program's company- and job-growth goals. That's one reason the Third Frontier is not well-known, supporters said.
They believe job growth is a key selling point for the May 4 ballot -- thus, the campaign committee calls itself "United for Jobs and Ohio's Future."
Advocates said the extension is needed to maintain the program's momentum.
Jobs in Ohio's high-tech industries grew 4 percent from 2004 to 2008, while jobs in all other industry sectors declined slightly, according to a study done by the Center for Economic Development at Cleveland State University.
Richard Fearon, chief financial and planning officer at Eaton Corp., said he wished Ohio's business environment didn't need injections of tax dollars.
Critics, in fact, brand Third Frontier as "corporate welfare."
"But you also have to be realistic," said Fearon, who is the region's representative on the Third Frontier's nine-member commission. "This is an economy that unfortunately is making a transition from many industries that have lost their competitive edge to newer industries."
"If we're going to make that transition as quickly as possible and give the employment opportunities that I think our citizens want, then this investment is merited," Fearon said.
Critics like State Rep. Lynn Wachtmann, a Republican from Napoleon in northwest Ohio, said the state is giving an unfair advantage with direct grants to companies.
"We do inherent harm to the marketplace by taking corporate welfare and giving it to companies that, if they are a good investment, should be able to find investment elsewhere," Wachtmann said during legislative debate of the Third Frontier in February. "At best, these programs are neutral, if not harmful, by taking money away from someone who may invest it or give it to a cause."
But Fingerhut said smart, strategic investment decisions keep innovations at home.
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View full sizeAndy Sherman, chief executive of MesoCoat Inc. in Euclid, used a Third Frontier grant to move his patented, high-tech coating for airplane parts closer to market. "There's no guarantee if we let the free market operate without incentives that it would be made here in Ohio," Fingerhut said. "We're trying to encourage them to build those products here in Ohio."
MesoCoat's Sherman is doing just that.
A $175,000 "research commercialization" grant from Third Frontier helped advance his metal-coating technology. It uses a supersonic torch to blast a metal-ceramic layer onto airplane parts, protecting them from wear and weather.
Sherman used the Third Frontier money "to develop a business plan, establish our intellectual property base and do some prototyping," Sherman said. "It helped us to see if we had a real market."
Building business is a risk
Not every Third Frontier investment is successful, or works efficiently.
HydroGen Inc., a company that spun out of fuel-cell research at Case Western Reserve University, filed for bankruptcy in 2008 and is now defunct. It received a Third Frontier grant of $1 million in 2006 and spent $879,000, money the state did not recover.
Minorities get few
Third Frontier jobs
The Third Frontier is creating jobs. But too few of them are held by blacks and other minorities, officials say.
Just 694 minorities were among the 9,519 new and retained workers directly attributed to Third Frontier spending through 2009, the state reported last month.
The 7.3 percent minority share of the mostly high-tech jobs is less than half the minority share of Ohio's population.
The low number leaves black legislators like Sen. Shirley Smith unhappy, even as she and her black colleagues in the Ohio legislature say they support the proposed renewal of the high-tech development program.
"The state is spending a lot of dollars on emerging technologies, and it has not been inclusive," said Smith, a Democrat from Cleveland.
But the state's chancellor of higher education says the Third Frontier program has reached out to minority businesses and entrepreneurs, in compliance with Third Frontier laws.
"Clearly, no one would say that's a good or sufficient number," Eric Fingerhut said of the minority share of Third Frontier-related jobs. "But it's only one number and, frankly, a relatively minor indicator of the success of minority outreach efforts."
Still, he has acknowledged to black legislators that the program has not done a good job of gathering and analyzing details of the outreach effort.
"We should have better data on the number of minority companies that have applied and explored reasons why grants were awarded or not awarded," said Fingerhut, who also chairs the Third Frontier Commission.
Smith has called the lack of information "inexcusable."
The commission will compile such data now, Fingerhut said. And requirements to do so could be part of new laws that enable the $700 million, four-year renewal of the Third Frontier program, if voters approve a bond-issue proposal on the May 4 ballot.
Fingerhut's response mollified Smith and other black legislators -- to a point.
"I know for a fact that many minority companies have applied for Third Frontier funding, and they have been denied," said Ohio Rep. Sandra Williams, a Democrat from Cleveland. "We need to pay closer attention to the needs of minority businesses that want to be involved and have an active role in creating jobs for the future."
Third Frontier laws require special efforts to reach minority businesses and entrepreneurs.
Those efforts must include making direct contact by phone; notifying minority technical trade and economic development organizations of Third Frontier opportunities; and identifying minority technology firms and marketing them to the investment community.
Fingerhut said the outreach is done through contracts signed with lead organizations in six regions of the state. Those groups receive millions of dollars to foster new businesses under Third Frontier's Entrepreneurial Signature Program.
In Northeast Ohio, the lead organization is JumpStart Inc., a venture-development nonprofit.
JumpStart efforts included informing some 7,000 minority entrepreneurs about its services. It also invested $3.3 million in 11 minority-owned companies, which raised $31 million more from other sources, JumpStart reported.
JumpStart also worked with state development officials on a new Launch 100 initiative, which aims to create a pipeline of 100 minority-owned and inner-city businesses statewide within five years.
One reason minorities hold a low percentage of high-tech jobs spinning out of Third Frontier is the relatively low number of minorities earning tech-related degrees in science, math and engineering, officials believe.
Ohio wants to boost those numbers with a number of strategies, including establishing science-and-technology high schools in Ohio's big cities.
Cleveland has two of them, and the school district's transformation plan calls for a specialized science-and-math focus at several elementary schools.
Black legislators believe another key would be using Third Frontier money to bolster the state's work force-development programs, which seek to build the high-tech skills of job seekers.
The state must be more aggressive in linking minorities and laid-off workers to training programs, said Ohio Rep. Tracy Heard, a Democrat from Columbus.
"There's a gap between these workers and getting them into the loop [of training] for all these new products and processes," she said.
Fingerhut said spending on work-force development was "an appropriate subject" for the Third Frontier Commission to consider.
-- Tom Breckenridge
Cleveland State University nearly lost a 2007 grant of $24 million to establish a center for sensor-systems engineering because of lagging land acquisition and other problems.
The CSU center, under scrutiny from the state, has recommitted to the project and expects to dole out some $17 million in grants this year.
State officials said such problems are an exception. The Third Frontier program has been a success, they said, largely because it's free from politics and based on merit.
Typically, the state seeks proposals that feature collaboration between universities, businesses and development organizations.
Independent experts, such as the National Academy of Sciences, review, rank and recommend proposals to the Third Frontier commission.
But the nonpartisan, merit-based approach came into question earlier this year.
For the first time, the Third Frontier Commission limited who could apply for its entrepreneurial-assistance programs, which include money for venture capital funds that invest in early-stage companies.
Only past participants were eligible to apply for the $11 million the commission will hand out later this year.
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View full sizeSelf-dimming rear-view mirrors for motorcycles are a new product that Kent liquid crystal company Alphamicron is developing with the help of Third Frontier money.The Associated Press reported in February that lobbyists, executives and directors with the eligible venture funds, and their spouses, gave $220,000 to Ohio political campaigns.
Third Frontier critics called the decision corrupt. But Fingerhut and others said it was prudent, not political.
Given the historic recession, Third Frontier commissioners said it only made sense to work with venture capital funds that had a proven track record of handling risky investments.
The Third Frontier program has also come under criticism from Ohio's black legislators. They support the program, but are unhappy that just 7.3 percent of 9,519 jobs created by Third Frontier spending are held by minorities.
Third Frontier officials have promised to analyze the effort to reach minority-owned companies and entrepreneurs.
One thing is clear -- Third Frontier has been a boon for Northeast Ohio.
Some 40 percent of the nearly $1 billion in grants awarded in the Third Frontier's first eight years have flowed to multimillion-dollar, business-building efforts across the region.
Those included biomedicine in University Circle, polymers in Akron, liquid crystals at Kent State University and fuel cells in Stark County.
"Very frankly, geography has never been an evaluation criterion that we have used at all," said John Griffin, director of the Ohio Department of Development's Technology and Innovation Division.
Overall, Ohio's Third Frontier program appears well-managed and effective, compared with efforts in other states, said Daniel Berglund, president and chief executive of the State Science & Technology Institute, a Columbus-area nonprofit group that promotes high-tech economic development.
Third Frontier is aggressive in its spending and comprehensive approach, he said.
Other states key on enhancing research, helping entrepreneurs or supplying capital for startup companies.
"Third Frontier is addressing all those stages in the pipeline," Berglund said.
The ultimate marker of Third Frontier's impact is its overwhelming bipartisan support in the Ohio Legislature, he noted.
"If it were not being well-managed, or managed in a partisan fashion," Berglund said, "you wouldn't have that strong support."