Did RDA Waste $30 Million?

Councilmember Sam Liccardo submitted a memo late Thursday calling for an audit of four incubator programs funded by the San Jose Redevelopment Agency. The request responds to a 2009 study—unseen by most city officials for two years—which finds that RDA spent more than $30 million on business-building incubator programs which, it says, showed very poor returns on investment. Many of the incubated companies left San Jose for neighboring communities, the report noted.

Other companies stayed too long. “One company has been in the incubator for 11 years, occupies the entire fourth floor of the incubator and some space on the third floor. The company ... is clearly beyond incubation,” the authors observed.

The study, conducted by three consulting firms hired by RDA to assess its $30 million-plus investment in four incubators, found that the incubators had an estimated overall economic impact of $515 million to the local economy.

However, the study lists the annual revenue to the city at only $280,980, or about $4.2 million total.

According to the study, only 11 percent of the 288 companies that “graduated” from the incubator and were still in business were located in San Jose. Annual tracking of businesses ceased in 2004. The study also noted a serious lack of oversight, as 58 percent of the incubator companies did not even have a business license in the city of San Jose.

“Suffice to say, it’s plenty frustrating to those of us who have been asking what kind of return we’re seeing on taxpayer’s investments and the answers have been buried for a couple years,” Liccardo says. “It undermines the ability of those accountable to residents and taxpayers if we don’t know the truth.”

During the 15-year period covered in the study, the RDA worked in partnership with San Jose State University Research Foundation (SJSURF), which co-sponsored and managed four incubators: the Environmental Business Cluster (EBC), the Market Access Center (US MAC), the Biocenter, and the Software Business Cluster (SBC). The SBC has since been shuttered.

The study says that from 1994 to Nov. 30, 2008, the RDA spent $19,385,351 in annual lease payments (incubators and business service programs), $10,474,760 in building improvements and equipment (BioCenter) and $568,511 on business outreach and studies. All management and oversight of the incubator programs was done by SJSURF.

It’s unclear why councilmembers never saw or heard details of the report until now. According to Mayor Chuck Reed, he and Councilmember Nancy Pyle drafted a memo to include it on the Community and Economic Development Committee agenda for May 2009. Reed says he was not part of the committee, which had Pyle as its chair and included councilmembers Liccardo, Rose Herrera and Ash Kalra. The committee—or RDA staff—deferred the item multiple times until it was ultimately dropped.

Liccardo’s memo says it is important to note that about 80 percent of the $515 million positive economic impact was “attributable to a single company, Callidus Software, as of the date of the 2009 report.” Several months later, Callidus relocated from San Jose to Pleasanton.

Taking Callidus out of the equation, the incubators created only 150 jobs in San Jose over a 15-year period, according to Liccardo’s memo. He adds: “It appears unclear whether some or all of those 150 employees are the same people employed at the [firms] prior to [their] incubator tenure.”

Harry Mavrogenes, who was Executive Director of the redevelopment agency from late 2004 until May of this year, says the agency took the report to heart and encouraged SJSURF to pay cloiser attention to the incubators.

“Bottom line is [RDA] monitored the programs,” Mavrogenes says. “They did this study to make sure things were going as well as possible. Based on the study, corrections were made.”

Mavrogenes adds that incubators are always “risky”—similar to many start-up ventures, but steps were taken by the SJSURF to address the 2009 study. Those steps included managers being replaced, eliminating the software cluster and consolidating rented space to one office on Santa Clara Street.

“It looks like the only fault along the way is the report never got to the council,” Mavrogenes said. “It probably should have. I’m not sure what happened. But it wasn’t buried somewhere. The results were taken to the operators.”

Mary Sidney, Chief Operating Officer of the SJSURF, was not available for comment. But in Liccardo’s memo, at a June 17 session where the City Council unanimously approved a $400,000 rent payment for the Biocenter inclubator—Sydney “candidly admitted that the 836 jobs that Redevelopment claimed that the Biocenter had ‘created’ actually included many of the company founders and other employees who pre-dated the company’s tenure in the Biocenter.”

Mayor Reed said the council has begun to take steps that will eliminate city funding for incubators within about a year. Stopping RDA lease payments for the Biocenter—and roughly 100 other businesses contained in the other two incubator programs—is impractical due to ongoing lease agreements, he says.  The city is taking steps to transition to a new model that would allow incubators to continue operating independently.

“Whether you’re a fan of incubators or not a fan of incubators—poeple can argue with about their success—we can’t afford to continue to do that,” Reed said. “That’s been a concern of mine for years and we’re working on it.”

The mayor added that there have also been successes to come out of the incubators.

“To be fair to the incubator program, you have to look at what they did, and one of the objectives for the bioscience incubator was to create a biotech industry to help diversify our economy,” he said.

“I think one of the lessons here is knowing what the metrics are when you start something so you know if you’ve succeeded.”

Click Here to Read Sam Liccardo’s Memo about RDA Incubators.

2009 Report of San Jose Redevelopment Agency Incubators.

Josh Koehn is a former managing editor for San Jose Inside and Metro Silicon Valley.

18 Comments

  1. a significant amount of rda money went to a project headed about dayana salazar over at san jose state.  It was the Five Wounds project, and also had a link to a junk mortgage company operated by her husband.  Yep, the very same junk mortgages that polluted our economy, but made money for salazar and her husband, while they were being paid from rda funds to set up a project which never produced results.  Salazar ignored the South Campus area, would play favorites with the funds, and often directed the RDA staff to modify the data.  Hope the court reviews this data.

  2. I hope Mr. moon Beam Kicks Reeds butt. Gonzo should be tarred and feathered, and placed next to the feathered serpent,that Blanca spent 1/2 million bucks on!
      How transparently discusting the good old boy politics is in this backward prune town.
      I used to love this town!

      Mombo Jumbo

      • Ron made mistakes, big ones no doubt but outside of his mistakes I always found him to be a caring, if not passionate mayor.

        He pushed for Sunshine government.  He gave the people a voice through open forum, and although the open forum bylaws are written that council and mayor can’t respond, he’d always break those.

        He’d hold them late too (7pm) You could actually not have to take time off work to address the council.

  3. The surprising thing about this all is not that the Redevelopment Agency might have misspent millions of dollars – it’s that the RDA actually kept track of things to see if they met “goals”!  Y’mean they actually had some sort of gauge to measure the success or failure of their (our) investments?  And there were actual “goals”?

    My apologies to the RDA for thinking they were just a rob-Peter-to-pay-Paul, shoddy, unaccountable, welfare-for-millionaires, Ponzi schemed shell game.

  4. These incubators have been touted as models by the National Business Incubator Association and been copied in other cities, states, and countries.I doubt any others have been formally assessed, either. Government planning of the economy didn’t work in the Soviet Union, and it doesn’t work in the USA or Europe, either. That’s why debt has been accumulated and a global crisis has developed.

    We live in interesting times that will become even more exciting in the near future.

  5. The major shortcoming of the program was that the incubator program should have pursued obtaining % ownership of the companies or at minimum shares of the companies they were helping to develop and grow. When or if the companies were to go public, then the RDA would be able to recoup its investment by the sale of stock. It could even generate more revenue to aid more companies from the proceeds from stock sales. It would then no longer need additional government funding.

  6. If the Mercury is to be believed (something that is not easy to do anymore), Mayor Reed knew about this report over 2 years ago, and sought to keep it from coming to light and into the public forum.

    “But Abi Maghamfar, former deputy executive director of the agency, said he remembers attending a meeting in Reed’s office June 11, 2009, with the mayor and Ru Weerakoon, the mayor’s senior policy adviser for economic development and land use. Also attending were John Weis, then the agency’s assistant executive director, and agency staffer Leslie Parks.

    Maghamfar said the meeting was called to discuss the report as well as a recommendation to close the Software Business Cluster incubator, which the report said had run its course.

    Maghamfar also said the report showed that although some aspects of the incubator program had been positive, it was “not complimentary” and that the incubators had not shown a return on investment.

    Maghamfar said that everyone in the meeting agreed that the report would not be made public, except to the university’s research foundation.

    Reed said Friday he did not recall the meeting.”

    Pretty damning to Mayor Reed’s reputation if this is true.

    http://www.mercurynews.com/politics-government/ci_18674110

  7. Community and Economic Development Committee with agenda Pyle as its chair and included councilmembers Liccardo, Rose Herrera and Ash Kalra

    So now that elections are coming up,  Liccardo and committee gets interested in where $30 million RDA taxes were wasted.

    Where is Council committee accountabuility to taxpayers when it was Liccardo and committee’s duty to oversee where taxes went but he more interested in giving millions taxes away to his friends and political supporters

    Politics as usual in San Jose, Council doesn’t do their job and then acts surprised and tries to blame others when it was them again

    • My thoughts exactly.  NOW he is going to say something?  Come on.  He hip pockets this till now so he looks like he is doing something?  He should have done something two years ago.  The real question is what else does he have in his hip pocket that is currently wasting the tax payer’s money?  This is BS politics as usual in SJ.

  8. While, it’s true that, “the major shortcoming of the program was that the incubator program should have pursued obtaining % ownership of the companies,” but then they’d be acting as an investor, which is probably against the city charter, and possibly the state constitution. Governments shouldn’t be investors; instead, they should act as referees and allow private industry to manage businesses.

    Most states abolished government ownership of corporation shares after the Credit Mobilier scandal in 1870, but government economic planning has come back into style. Didn’t anyone learn anything from the failure of the Soviet Union? Should rich people really be receiving welfare?

  9. San Jose Council has for last 30 years wasted hundreds millions on poorly designed and incompetently run government business and job promotion plans while rest of Silicon Valley easily and for almost no taxes spent attracts Apple, Netflix, Google, HP, Tesla, many startup and growth   companies

    These companies with their thousands jobs and millions tax revenue could have chosen San Jose but didn’t

    Why do companies year after year not chose San Jose which for decades has less businesses, jobs, tax revenues but provides much of Silicon’s Vally housing ?

    Why did ” only 11 percent of the 288 companies that “graduated” from the incubator and were still in business were located in San Jose. Annual tracking of businesses ceased in 2004. The study also noted a serious lack of oversight, as 58 percent of the incubator companies did not even have a business license in the city of San Jose. ” ?

    Failed Council leadership comes to mind, high taxes / fees, bad time consuming Council policies and approval process, poor understand of why companies locate where they do

    City administration has never understood that lower taxes /fees and quick simple logical approval process attract companies but bureaucrats always recommend higher taxes / fees and more time consuming, costly approval processes that drives tax paying companies to other cities

    San Jose has NEVER tracked when business leave city where they go and why they left. 

    Probably because Council and City administration would have to answer – Why San Jose has worst unfriendly business conditions in Silicon Valley

    San Jose should be renamed – Unfriendly Business Capital of Silicon Valley

    • It was even worse when a person tried to rehab, convert, or simply open a business within a redevelopment zone!  Then there were two sets of bureaucracies with often conflicting criteria to meet!  The City had its set of rules, RDA had theirs – a model of municipal dysfunction.

      Imagine this as well, when our new City Hall was built, flaws were found by the City’s Building Department, (because after all, that’s the building that they work from), but there was nothing that City inspectors could ask to have done about it because City Hall was a Public Works project – inspected by Public Works inspectors.

  10. > The study also noted a serious lack of oversight, as 58 percent of the incubator companies did not even have a business license in the city of San Jose.

    I’m not sure whether this is significant.

    Many businesses in incubators are startups that have no products, no customers, and no revenue streams.

    If such companies are not selling anything and not collecting any revenue, do they even need a business license?

  11. Come on RDA is just a scam to launder public funds into private hands. In turn a percentage is paid to those in power. Anyone know how much money Chuckie received in the way of donations from incubator projects. 
      This is one way you see the media is owned. A real reporter would have jumped all over this. I really want to see a total of all the monies given to elected officials by those who are given RDA monies.

    • I still would like a full accounting of the RDA and the full report on the successes or lack thereof for the incubator businesses and business owners….and find out the name/names of the owers of the buildings the RDA paid out all those rent payments to….  my gut tells me we’re not going like the findings!!!  I totally agree with SCAM’s comments..  We have to learn from our previous mistakes, prosecute this “insider” mentality, and as they say FOLLOW THE MONEY!!! We can’t keep hiding important memos and not let the public aka taxpayers know where their money is being spent.  The RDA, the Council etc should all be ashamed of themselves and I hope the news media starts a brand new investigation in spite of the fact so much time has passed.  I’m not that naive to think similar scams are not still taking place!  Start “outing” this crap instead of hiding it; otherwise, San Jose will continue to go downhill as we are now.

%d bloggers like this: