A month into this General Assembly session, the legislature released a searing audit, faulting the Maryland Technology Development Corporation (TEDCO) for investing in companies not based in the state and forming an investment advisory committee that included two members associated with firms that had received more than $21 million in funding from a corporate venture fund.
The report was released Feb. 8 – providing just enough time for lawmakers to fully attack the problem during their 90-day annual session. They held hearings, drafted and redrafted bills, grilled nominees and withheld money from the 2020 TEDCO budget.
On Wednesday, the full fruits of their labors came to pass on the Senate floor.
The Senate got its first look at a heavily amended Senate Bill 340 on Wednesday morning. The bill would establish a new investment committee in TEDCO subject to regulations and state ethics laws, add reporting requirements, and more narrowly define the types of Maryland-based businesses that would be eligible for initial funding, among other changes.
The bill was originally introduced by Montgomery County Sen. Cheryl C. Kagan (D) and re-drafted with the help of a bipartisan workgroup of House and Senate lawmakers, including those who had also introduced measures this session to make changes at TEDCO before the audit was released publicly.
“The product in front of the body is the result of a collaborative effort” to address the audit findings, “which quite frankly were critical,” Sen. Brian J. Feldman (D-Montgomery) said Wednesday.
TEDCO leaders were not available for a comment on the legislation Wednesday.
A final vote on the bill in the Senate chamber could come this week.
Earlier this week, lawmakers struck an entire $16 million proposed increase to the 2020 TEDCO budget, which would have established Maryland Technology Infrastructure Fund. Lawmakers directed the funding to other legislative initiatives instead.
TEDCO was created by the General Assembly in 1998 to support new businesses seeking to commercialize technology developed at state universities, private companies and federal laboratories.
The fiscal compliance audit released in February reviewed corporation activities between January 2015 and April 2018.
The audit concluded that there were significant problems with the Maryland Venture Fund, the largest of more than a dozen programs operated by TEDCO.
As of June 30, $102 million of TEDCO’s $114.7 million net position related to the venture fund.
Before the program was transferred from the Department of Commerce in 2015, a Maryland Venture Fund Authority oversaw investments.
Once the program moved to TEDCO, the authority became defunct – though it remained in statute – and TEDCO’s board relied on advice from a three-member investment advisory committee.
The audit found that two of those three members were associated with venture firms that had previously received $21 million in commitments through the fund before their appointment. TEDCO had not established any policies to govern the committee and members were not required to be independent or file ethics disclosures with the state.
In responses to legislators, TEDCO representatives said they would like the three-member investment committee to replace the defunct authority and would move forward with ethics reporting requirements.
Senate Bill 340 retains the nine-member Venture Fund Authority and clarifies that members of the authority cannot have financial conflicts.
The audit also found problems with two functions of the venture fund investment program: one in which TEDCO invested directly in companies and another in which TEDCO gave money to third-party venture funds to invest.
According to auditors, TEDCO had failed to adopt regulations for direct equity investments and a randomized review of 10 investments from May 2016 to January 2018 revealed six investments to four companies totaling $4.7 million, in which each company’s principal place of business was not located in Maryland at the time of the investment or following the investment.
The auditors said TEDCO didn’t adequately monitor the third-party venture firms. Six of eight firms that received funding didn’t provide quarterly reports required by their investment agreements. And one firm, which had received $6 million of a $10 million commitment between December 2013 and June 2018 had not made any investments in Maryland companies as of June. TEDCO had not established a process to claw back funding in the program when firms didn’t make investments.
In an initial audit response, TEDCO said it was exploring ways to recover that investment.
After the audit was released publicly, TEDCO hired a Washington, D.C., crisis communications firm headed by high-profile attorney Lanny J. Davis and sent an extended response about the findings to lawmakers and the Office of Legislative Audits.
In separate testimony sent to lawmakers, TEDCO officials noted that since the Maryland Venture Fund’s transfer to TEDCO from the Department of Commerce in 2015, the fund’s companies had a higher proportion of jobs in Maryland. The companies in the venture fund’s portfolio had 46 percent of their jobs in the state of Maryland at the time of the letter.
The hiring of the crisis communications firm came up during a brief hearing this legislative session for the nomination of Tina Williams, a veteran cybersecurity professional, to the TEDCO board.
“There are some major errors taking place at TEDCO. We thought they would try to fix the problems, and you know what they did? They hired a PR firm! We are not happy at all at all at all,” Senate President Thomas V. Mike Miller Jr. (D-Calvert) said.
Despite the fireworks, Williams, who promised to relay Miller’s message at the next board meeting, was confirmed unanimously by the Senate without discussion.
Lawmakers working on TEDCO issues this session said the corporation had strayed from an initial goal to incubate and grow businesses in Maryland.
House Speaker Pro Tem Adrienne A. Jones (D-Baltimore County), at a bill hearing earlier this session, said the legislation to reform the corporation was “meant as a course correction to ensure that TEDCO stays on the path that was originally intended by the legislature.”
While TEDCO leaders said they supported the general notion of requiring a minimum state-based workforce level, they also testified at hearings that the percentage of Maryland-based jobs in growing tech companies can swing substantially as the companies grow and hire specialized staffing units.
“We would love to have every company we invest in and work with in Maryland have 100 percent of their employees here,” TEDCO CEO George M. Davis said at a bill hearing in February. “The reality is … the tech community moves very fast and it’s very competitive. And to build a good company, you’ve got to find and hire the best talent you can. And sometimes that talent just isn’t in your neighborhood.”
Senate Bill 340, as amended, would define businesses that qualify for funding as those that intend to keep a principal office in Maryland and employ at least half of its workforce in the state at the time of the initial investment. Start-ups that are determined to have a substantial economic impact on the state would also be eligible for funding.
While working on the bill, workgroup members from the legislature reviewed salary increases and bonuses given to TEDCO senior staff members since 2015. In the 2019 fiscal year, six senior staff members had salaries totaling nearly $1.4 million, with an additional $323,577 awarded in bonuses.
The Senate bill would now require an annual report on the salaries and incentives approved by the board for corporation employees.
Other new reporting requirements include an accounting of all entities that have received funding in the past year, including the principal place of business operations, the number of employees in Maryland and outside the state, and a list of businesses that received funding and would no longer be considered qualified businesses.
Josh Kurtz contributed to this report.