McAuliffe takes his shot

It’s likely to be the governor’s biggest year. Because of the commonwealth’s single-term limit for governors and its biennial budget schedule, Virginia governors get one shot to put together a budget they’ll actually oversee. A recovering economy and a two-year delay from federal sequestration cuts are providing a better budget picture for Virginia than it has seen in years.

Despite the reprieve from Congress, Gov. Terry McAuliffe says Virginia must continue to diversify its economy. In addition to major investments in K-12 education, he is planning on a number of economic development actions. Those plans include cutting Virginia’s corporate tax rate from 6 percent to 5.75 percent, extending the commonwealth’s research and development tax credit and adding a new one that targets larger companies spending more than $5 million annually on research.

McAuliffe also is planning a bond package to fund higher education research and facilities and wants to expand the state’s cybersecurity workforce. His goals include achieving a national cybersecurity certification at all of Virginia’s 23 community colleges. “The good news is that I have 18,000 jobs open right now at $88,000 starting salary for these jobs,” McAuliffe says.

One issue that could dominate this year’s General Assembly session is Medicaid expansion — a perennial battle between the Democratic governor and the Republican-dominated legislature. McAuliffe’s budget (which was finalized after this interview), included Medicaid expansion under the federal Affordable Care Act at an expected savings of $157 million. He also proposed a hospital assessment fee to help pay for Virginia’s portion of the program.  Republicans have vowed to strip Medicaid from the budget.

In December, McAuliffe received a boost from the Virginia Hospital and Healthcare Association, which announced it would support paying a tax that would help Virginia fund its portion of Medicaid expansion. “We’ve already forfeited about $6 billion dollars,” says McAuliffe. “That money would have run through our economy. That money goes to save our hospitals.”

Virginia Business interviewed the governor in mid-December at his offices in Richmond and discussed a range of issues including the budget, transportation, Medicaid expansion and economic development.

Virginia Business: Let’s talk about your proposal to lower the corporate tax rate. Do you think, with North Carolina potentially going to 4 percent, is a quarter percentage point enough? 

McAuliffe:  I think psychologically there is a big difference. They were at 5, and I do think they have some triggers on theirs for theirs to continue to go lower. So let’s just say they’re at 5 percent today, but maybe they’ll hit the benchmarks…A lot of negotiating is psychological. We can be competitive at 5.75, but we’re a little bit out of the game at 6 … 

I know some may find it hard to believe, but, when you’re actually sitting with business executives, literally one of the first questions is “What’s your tax rate, again?” And a door could come down immediately on you before you even get into the negotiations…In Virginia we always pride ourselves on being one of the top states in the nation to do business. We’ve been hurt a little bit in our rankings. Number one, and I think rightfully so, they have said we are too reliant on the federal government … The other thing that hits us is that we’ll find out after the fact that we were looking to be part of a project, but we got knocked out before we even knew about it, and could even make a pitch, because our cost-of-living numbers are so high. 

What is very unfair about that is that Northern Virginia is lumped together with the rest of the state. And I’ll talk to a CEO and often say “Are you kidding me? If I had known this, I could take you to Southside and Southwest Virginia.  I can get you some of the low cost of living that would have made sense for this type of manufacturing.” But a lot of times, you never even get the chance.  So I think taking the corporate rate down sends a great signal across the country and the globe: Virginia is serious about recruiting businesses.

VB:  You’ve said that 2016 is going to be a banner year for economic development. I know [those deals] are going through some of the permitting processes, but can you give us an idea on industries that we might see investment from?

McAuliffe: I’ve got one huge project we’re working on. I’ve got a handshake with the owner of the company from overseas. We’ve got to get through a lot of permits: water permits, air permits and things like that. It would be similar to the Tranlin project [in Chesterfield County that is expected to add 2,000 jobs.] Until you get all those permits, you never know, but I’m optimistic. We’ve got new manufacturing projects lined up. Some of our existing businesses we’re working with on major expansions.

I’m really trying to key in the cyber, the data, the personalized medicine space — predominately in Northern Virginia. I do want us to become the [cybersecurity] capital. This is one area the federal government is going to spend billions of dollars, and the private sector is going to spend billions of dollars … The state that is out at the forefront of this [trend] is going to be the state that is going to bring those businesses. We have about 450 cyber companies today, and the FBI cyber command is up at Quantico. We have all the military defense assets, so I think we are uniquely positioned to become the cyber capital, and that’s going to be gigantic growth for us. 

I recently met with solar manufacturing companies. You know I’m big on the renewables. It’s important for Virginia’s future. I just [announced a permit for an 80-megawatt solar facility in] Accomack, which will be the largest in the mid-Atlantic; and the second-largest solar field on the East Coast.

Why is it important?  Well, obviously it’s important for the environment, but we ought to be manufacturing the solar panels here in Virginia not in Georgia where they were manufactured for the facility. And when I was up to visit Amazon and Google and Microsoft, all three made it very clear you need to provide us with renewable energy for our facilities or we will not come to your state.
 

VB:  As far as personalized medicine goes, we just named Knox Singleton of Inova our Business Person of the Year, much because of his vision for the Center for Personalized Health. 

McAuliffe: This is something very important to me, but we can become the state for personalized human genomic sequencing, all the new proteomics. We can become that state where people go to, and when a child is born, you can determine, at birth, what diseases …. that child may be susceptible in the future to and start doing treatments early. I mean this is revolutionizing health-care delivery.

That’s why I’ve been so focused on research. I recently went down to Georgia. They have the Georgia Research Alliance. It’s unbelievable what they have done down there…they have literally rebuilt the Georgia economy…I want to do the same thing here in Virginia.

For years and years we were the top recipient of Department of Defense dollars. [The money] just came in, and we didn’t really have to work for it. I don’t mean it negatively. I’m just saying [that was] because of all of our assets. Well, that’s shrinking. Fifty percent of the GDP of Hampton Roads is defense, and 33 percent of Northern Virginia is defense. The pot is getting smaller. So we now have to hustle to bring in business. It just doesn’t come anymore…

We really have to bring in new 21st diversified businesses here to Virginia. We now have to work for it. It’s not just going to happen.  It’s great to have proximity to Washington, D.C., and we love all the investments we can get out of there, but we now need to travel the globe. Ninety-five percent of the customers of the globe live outside of the United States of America.  That’s why I travel as extensively as I do.  You gotta go where the customers are. 

VB:  Are there any other big issues that we can expect, that would be specifically of interest to the business community for this session?

McAuliffe: I’m doing a massive bond offering for our colleges and universities for research.  It will be a huge higher-ed bond package to allow them to build new research facilities on their campuses.

VB:  And then, I did want to talk about Medicaid expansion, and the opportunity you see there. 

McAuliffe: Yeah, $2.4 billion dollars a year, we are forfeiting right now. We’ve already forfeited about $6 billion dollars. That money would have run through our economy. That money goes to save our hospitals. We have 37 rural hospitals.  Today 17 operate in the red. I don’t know how much longer they can go with the continued cuts … I can save our budget upwards of about [$157 million with Medicaid expansion]. That is money I can use to spend on education, economic development. The point is: This is our money. We’ve paid it in.

I have said from the beginning, I believe we can craft a very unique Medicaid expansion in Virginia where the commonwealth has no financial obligations. It will not cost the commonwealth a penny. [The hospitals association has] indicated it’s worth it for them to put up the money [through a “bed tax”] for the cost of us to run this program and do what we need to do. Because for every dollar they put up, they probably get five or six back. So it makes economic sense for the hospitals to do this. That means we can craft a program, no obligation, provide health care to 400,000 Virginians. That $2.4 billion will run through our economy … It’s our money; we ought to bring it back.

VB:  Let’s talk about transportation.  The P3 process has received a lot of attention in the last year.  How does Virginia ensure that it gets good deals when it does these projects?

McAuliffe:  Well, we’ve done some good P3 deals here in Virginia. We’ve done some horrible P3 deals in Virginia. As you know, I had to stop some projects that were negotiated before I sat here. The Route 460 deal was incredible; $300 million dollars wasted on a road with not a shovel in the ground or a permit being applied for. We stopped it. It’s one of the first things I did in office.

The Midtown Tunnel deal [in Hampton Roads], one of the worst deals I’ve ever seen negotiated. We had to pay down the tolls by half. I had to eliminate the tolls on the Martin Luther King Freeway.

They were bad deals, plain and simple. Those deals would never happen in this administration. Listen, we enjoy negotiating, and I don’t blame the businesses … If they brought in better lawyers, and they outnegotiated us, shame on us.  It’s not the businesses’ fault. Let me be clear. I don’t blame them. Their job is to negotiate the best possible deal they can for their shareholders, and boy did they get a great deal, but my job is to get the best deal for the taxpayers.