SSTI Digest

The fourth installment of the Tech Talkin' Govs series includes highlights from state of the state, budget and inaugural addresses from governors in Hawai'i and Texas.

Hawaii's tax credits for research and investment in high-tech companies have cost the state more than $747 million since it was instituted in 1999 through the end of 2007, according to the study. The Department found that the state's investment has yielded only one full-time job at the associated firms per $535,000 in credits. In response to the report and the state's tightening fiscal situation, Governor Linda Lingle announced that more restriction would be put on these credits under the upcoming biennial budget.

An upcoming report finds that Hawaiian high-tech industries contributed $3 billion to the state's economy in 2007. Preliminary data released to Pacific Business News by the Hawaii Science and Technology Council indicates that the state is home to almost 2,000 high-tech companies in ten sectors, including biotechnology, aerospace, energy and information technology. The complete report is due later this summer.

Armed with professional advice from mentors in scientific fields and free access to sophisticated design and engineering software, teachers and students from Hawaii, Kansas, Minnesota, Oklahoma, Vermont and Virginia will participate in a national competition to solve a real-world engineering challenge defined by the aviation industry.
 
The idea behind the U.S. Department of Energy’s (DOE) Real World Design Challenge is to create a pipeline of highly qualified workers by preparing high school students for careers in science, technology, engineering and mathematics (STEM) fields based on issues facing high-tech and defense industries.
 
Ralph Coppola, director of Worldwide Education for Parametric Technology Corporation, said many aerospace and defense companies that work as contractors to national security agencies are concerned the U.S. is not producing enough qualified workers who must be able to work on both the defense and commercial side. A survey conducted with these companies in the Northeast found 54 percent of the workforce is 45 years or older and one-third are eligible for retirement today. At the same time, engineering degrees make up only 5 percent of the total baccalaureate population in the U.S., Coppola said.
 
U.S. Continues to Trail Behind in STEM Graduates
A coalition of 16 leading business organizations echoed this concern with the release of a report last month assessing three years’ progress in working toward a goal of doubling the number of students earning bachelor’s degrees in STEM fields by 2015. The report by Tapping America’s Potential indicates growing support for the group’s agenda to advance U.S. competitiveness in STEM, but shows little progress toward the goal. In fact, the number of degrees in STEM fields awarded to undergraduate students has only grown by 24,000 since 2005 – a small increase that is not on track to reach the goal of 400,000 over the next seven years, the report finds.
 
The Real World Design Challenge hopes to reverse this trend by providing high school students with the background and framework for competing more effectively in the global economy. In designing the program, aerospace and defense companies voiced a need for employees having seven to 10 years of experience and the necessary education and skills. Recognizing that this requirement would add another decade to the pipeline, program administrators suggested integrating the real-world experience at the K-12 and undergraduate level. 
 
Engaging Youth in Real-world Situations
Ten states with significant aerospace industry presence were invited to participate in the challenge during the pilot year. So far, six states have confirmed their participation, beginning with an announcement last month from Vermont Gov. Jim Douglas. Next year, the challenge will be open to all U.S. states and territories. Once a school has signed on, the teachers are trained to use software and other tools to apply in teaching design and global engineering. Teachers will then lead teams of 3-7 students who will work on the same design challenge defined by Cessna engineers – an issue currently being addressed in the aviation industry.
 
Each participating teacher will receive nearly $1 million in engineering software to be used in the challenge. Teachers and students are given access to DOE energy laboratories and may consult with industry experts from the Federal Aviation Administration. Teams will submit their solutions to a review board consisting of experts in government, K-12 education, higher education and industry. The governors of each participating state will announce a winning team within their state in early spring who will then go on to compete in a national challenge in Washington, D.C., which consists of a written submission and oral presentation on a newly defined challenge.
 
A major goal of the challenge is to teach students to become better innovators, Coppola said. The student teams are built around real industry roles, including a project manager, scientist, engineer, and community relations and marketing specialist. The national presentation will be much like submitting and defending a proposal for a contract or a thesis in which students are challenged and must defend their position, Coppola said.
 
More information on the Real World Design Challenge, a partnership between the U.S. Department of Energy, the Federal Aviation Administration, Parametric Technology Corporation, Hewlett-Packard Corporation and Flometrics Inc., is available at: http://www.scied.science.doe.gov/RWDC/index.html

National Governors Association
Twelve states recently received grants of $50,000 from the National Governors Association (NGA) Center for Best Practices to support clean energy initiatives and to overcome obstacles preventing the adoption of clean energy technologies in their region. The awards were made through NGA’s Clean Energy State Grant Program, a part of the association’s Securing a Clean Energy Future Initiative. Several companies and foundations, including American Electric Power, Dominion Resources, The Ford Motor Company and The Rockefeller Fund, have provided financial support for the grants, which are intended to fund state projects that support research, analysis, training or outreach to advance clean energy implementation.
Highlights from the list of awardees include:

Legislative approval of several measures to support the state’s energy initiatives were accompanied with lawmakers’ rejection of Gov. Linda Lingle’s proposals to fund Science, Technology, Engineering, and Mathematics (STEM) programs and expand TBED initiatives at the conclusion of the 2008 legislative session earlier this month.
 
Lawmakers allocated $8.7 million ($2.8 million above the governor’s recommendation) in fiscal year 2008-09 for the Hawaii Renewable Hydrogen Program, a key component of the governor’s Energy for Tomorrow package. The legislation stipulates that the Hawaii Strategic Development Corporation submit a report before the 2009 legislative session convenes on the measures of effectiveness of the program, details of expenditures, and a master plan for the renewable hydrogen program detailing planned expenditures.
 
The legislature also adopted Gov. Lingle’s proposal to expedite permitting of renewable energy facilities and created an energy facilitator position to assist with the permitting process in support the Hawaii Clean Energy Initiative.
 
The Hawaii High Technology Development Corporation will receive $100,000, half of the governor’s recommendation, to expand the Small Business Innovation Research and Small Business Technology Transfer assistance programs. An additional $100,000 to provide Hawaii firms with training workshops and one-on-one grant proposal assistance was not included in the final budget.
 
The approved FY 2008-09 supplemental budget does not include funding of $2 million for a second year of the Hawaii Excellence through Science and Technology Academy Program and Robotics Programs within the Department of Business, Economic Development and Tourism. Despite the setbacks, the governor’s administration will continue to partner with private sector and federal organizations to fund the STEM programs established last legislative session, according to a press release issued by governor’s office (see the May 14, 2008 issue of the Digest).
 
Lawmakers did not fund the governor’s proposal to appropriate $2 million to the University of Hawaii to establish endowed chairs in STEM and Energy. Additionally, lawmakers rejected HB 3073, authorizing the Employees Retirement System to invest $100 million in one or more venture capital funds that support innovative Hawaii companies. The proposal to create a new state-owned technology park, HB 3358, was stalled in committee at the close of the session. Gov. Lingle has until July 8 to act on the budget bills.

With the goals of reducing crude oil consumption by a whopping 72 percent and identifying clean energy sources to cover 70 percent of the state’s energy needs by 2030, Hawaii has signed a memorandum of understanding (MOU) with the U.S. Department of Energy (DOE) to figure out exactly how to get the job done under the Hawaii Clean Energy Initiative.

 

To call the plan merely ambitious seems like an understatement. Hawaii currently depends on imported fossil fuels to meet 90 percent of its energy needs, the MOU begins. Despite that, Hawaii already generates more of its energy from biomass than any other state.

 

Both the state and DOE believe the goal is reasonable, however, given the abundance of clean energy resources the islands naturally enjoy – sunshine, wind and geothermal sources. In addition, the cost of importing fossil fuels across the Pacific continues to make traditional energy sources less attractive economically. The MOU states “every 10 percent increase in world oil prices results in a 0.5 percent reduction in the state’s GDP.”

 

DOE’s role is to begin immediately, according to the agency. DOE promises to engage experts in clean energy technology development to help Hawaii launch several projects with public and private sector partners that target early opportunities and critical needs for the state’s transition to a clean energy economy, including:

Building on a successful legislative session in 2007, Gov. Lingle is requesting additional funds to supplement various ongoing TBED programs.

 

Seeking to continue a pilot program approved by lawmakers last year, Gov. Lingle is requesting  $2 million for a second year for the Hawaii Excellence through Science and Technology Academy Program and Robotics Programs within the Department of Business, Economic Development and Tourism (see the May 14, 2007 issue of the Digest).

 

Under the Strategic Industries Division (SID), Gov. Lingle is requesting one-time funding of $700,000 to establish a Bioenergy Program. The funding would be used to complete the statewide master plan for the program. Annual recurring funding would be necessary to continue operations, the budget documents note. To conduct the expanded responsibilities of the science and technology branch related to the Science, Technology, Engineering and Mathematics education priorities of the Governor’s Innovation Initiative, an additional $50,000 is requested within SID. The renamed Office of Aerospace Development would receive $235,000 to support a comprehensive assessment of the state’s aerospace potential and opportunities for expanding or diversifying aerospace initiatives.



Hawaii's High Tech Development Corporation (HTDC) would receive $200,000 under the governor's recommendation to expand the Hawaii Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) assistance programs. The increase would provide additional state funds to match the increasing number and larger amounts of federal SBIR awards and would allow HTDC to develop and fund the STTR program. An additional $100,000 is requested to provide Hawaii firms with training workshops and one-on-one grant proposal writing assistance under the Governor's Innovation Initiative.



To implement the Hawaii Renewable Hydrogen Program – a key component of the Governor’s Energy for Tomorrow Package – the governor is requesting $5.9 million from the Hydrogen Investment Capital Special Fund.

 

Gov. Lingle’s Executive Supplemental Budget for FY 2007-09 is available at: http://www.hawaii.gov/budget/memos/supplementalbudget/

Hawaii's research and investment tax credits for high-tech companies have been a issue of debate for nearly a decade. In a survey conducted earlier this year, 45 percent of a sample of high-tech business owners said these credits played a "major influence" in their decision to grow and expand in Hawaii. Opponents, however, claim that the program's generous tax breaks overstep their bounds by extending incentives to movie and television companies.

 

A new report from the Hawaii Department of Taxation suggests that, despite these concerns, the two credits have been successful in generating greater technology investment. The department claims that participating businesses attracted more than $821 million in investment, paid out $506 million in salaries, and have been a major driver of technology business in Hawaii since the credits were introduced.

 

Hawaii residents claimed $195.6 million in investment tax credits between 1999 and 2005. The tax department reports that qualifying businesses spent $1 billion on salaries and infrastructure and created more than 5,300 jobs in Hawaii. The most frequent applicants have been computer software firms, which have created 921 new jobs and attracted about $232 million in investment. Qualifying biotechnology firms created 217 jobs and spent about $80 million. Other firms participating in the program include companies in sensors and optics, ocean sciences and non-fossil fuels.

 

The report, however, includes several caveats to those findings, particularly its figures on employment. More than half of the new jobs cited by the department were created within performing arts companies. This represents about 2,800 new jobs. Performing arts businesses, however, employed only 307 people in 2006. The report explains that many of these jobs existed only for a short time. The tax department admitted that the jobs figures were not reliable since they also included jobs created outside of the state and by company suppliers. Also, the report does not differentiate between part-time and full-time jobs.

 

Though performing arts attracted an amount of investment on par with the more conventional high-tech industries and a large number of jobs, these jobs tended to pay much less than those industries. Between 2003 and 2006, the average salary paid to employees in the performing arts was only $17,412, compared to $32,191 in biotechnology and $31,935 in computer software.

 

Both the research and investment credits have been reformulated several times over the years to keep pace with the business interest in the program and to respond to the objections of many in the state who believe that the program definition of qualified expenses remains too inclusive to be beneficial to the state economy.

 

As interest in the credit grew, the state expanded the program in 2001. Act 221 increased the credit for qualified investments from 10 percent to 100 percent. The investment credit now provides a full return on cash investments over five years: 35 percent in the first year, then 25 percent, 20 percent, and 10 percent in the final two years. Up to $2 million in credits are available for each qualifying high-tech business per year. Businesses that qualified for the investment credit include computer software design, biotechnology, ocean sciences, sensor and optics technology and, over the objections of many in the state, the performing arts.

 

This flexibility led to increased concern that the incentives, particularly the investment credit, were not being properly targeted to benefit the high-tech economy. In 2004, the state legislature amended the credits to tighten the restrictions qualifying businesses. Act 215 requires firms to first apply for status as qualifying high-tech businesses (QHTBs) in order to receive either credit. All applicants for the credit must now demonstrate that more than 50 percent of their total business activities are qualified research and that 75 percent of that research occurs in the state of Hawaii. Additionally, more than 75 percent of a firm's gross income from qualified research must be generated by sales, manufacturing or production within the state of Hawaii.

 

While these restrictions did reduce the number of qualifying businesses, they did not eliminate the inclusion of performing arts firms as QHTBs. Opponents claim that these firms often provide only temporary employment while filming movies or television series and rarely contribute to the state's long-term high-tech growth. By providing an investment tax credit to these firms, the state merely creates a tax loophole for movie and television production companies.

 

A frequent objection to the administration of the credit has been its lack of transparency. Throughout most of the program's history, Hawaii's Department of Taxation did not release the names of businesses and investors participating in the program. That changed this summer following a report from the Tax Review Commission that criticized the program's lack of appropriate metrics, according to the Honolulu Advisor. The department will now identify participants so that the program can be evaluated in the before the sunset of the program in 2010.

 

Read the Hawaii Department of Taxation's report on the High Technology Business Investment Tax Credit at: http://www.hawaii.gov/tax/pubs/2007hitec_rpt07a.pdf

Gov. Linda Lingle announced 18 appointments to the Hawaii Innovation Council, which will work with groups statewide to increase the economic impact of Hawaii's innovation resources. Co-chairmen include Mark Benioff, Ron Higgins and Jay Shidler.

While legislators did not agree to all of Gov. Linda Lingle’s Innovation Initiative – including a $100 million innovation fund - some of the governor’s original concepts emerged from several other bills at the close of the 2007 legislative session last week.

 

The legislature passed a number of measures to promote science, technology, engineering and math (STEM) education, a major priority in the governor’s innovation package. SB 885 establishes the Career and Technical Education program within the state Department of Education and provides $5 million over the biennium for several technical education initiatives. Among those are Gov. Lingle’s proposals for the Hawaii Excellence through Science and Technology (HiEST) Academy Pilot Program and a Fostering Inspiration and Relevance through Science and Technology (FIRST) Pre-Academy Program.

 

Under HB 1630, Project EAST (environmental and spatial technology via experiential learning) will be maintained in existing schools and expanded to schools statewide. Project EAST incorporates cutting-edge technology into school curriculum in order to prepare students for high technology-based careers. Additional acts that incorporate portions of the governor’s original innovation package include:

With the opportunity presented by a $732 million budget surplus, Gov. Linda Lingle wants Hawai`i to shift its public investment philosophy away from land development and toward encouraging, nurturing and rewarding innovation, creativity, entrepreneurship and risk-taking. Most of Gov. Lingle's State of the State Address on Jan. 22 and her 56-page 2007 Initiatives booklet is dedicated to explaining how she wants the public sector to lead realignment of the state’s economy toward “one fueled by innovation and new ideas generated by our universities and a highly-trained workforce.”

 

Facing a legislature controlled by Democrats, the Republican governor’s plan embraces several proposals first advanced by legislative leadership last session, including a $100 million Hawai`i Innovation Fund. The privately managed technology-based equity fund would be capitalized from the State Employees Retirement System, under Gov. Lingle’s proposal. 



Other proposals include: