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115 STATE STREET MONTPELIER, VT 05633 TEL: (802) 828-2228 FAX: (802) 828-2424
REP. OLIVER K. OLSEN, CO-CHAIR SEN. TIM ASHE, CO-CHAIR JOHN CANNING JEFF COUTURE GREG KELLY LAWRENCE MILLER JOHN ROSENBLUM
STATE OF VERMONT
GENERAL ASSEMBLY
Enhancing Vermont’s Software and Information Technology Economy Committee Final Report - January 15, 2013 I. Overview The Committee on Enhancing Vermont’s Software and Information Technology Economy (“Committee”) was created in 2012 Acts and Resolves No. 143, Sec. 53A. The Committee was created to examine strategies the state could implement to further enhance the dramatic growth of Vermont’s software development and information technology sector. The Committee was directed to study ways to encourage the continued growth of investment and job creation in the software and information technology sector; to develop strategies to assist software and new media entrepreneurs to start new businesses in Vermont and to foster growth among established software businesses; to review workforce training and education opportunities as they apply to the software and information technology sector; and to review and make recommendations regarding the impact of current state programs and regulations, including existing economic incentives and current taxation policies. The Committee was composed of the following members:
Senator Tim Ashe, a co-chair of the Committee and the Senate’s appointed representative on the Committee. Representative Oliver Olsen, a co-chair of the Committee and the House of Representative’s appointed representative on the Committee. Rep. Olsen is a business leader with over 15 years’ professional experience in the telecommunications and information technology industry at the enterprise level, including almost ten years in the cloud-computing field. John Canning was appointed to the Committee as a representative of the Vermont Technology Alliance. Mr. Canning is the founder and CEO of Physician’s Computer Company, a 30-year-old technology company with 50 full-time Vermont employees that provides software and consulting services to pediatricians across the country. Jeff Couture was appointed to the Committee as a representative of the Vermont Technology Alliance. Mr. Couture is the executive director of the Vermont Technology Alliance, a business association dedicated to promoting, supporting, and expanding Vermont’s technology business sector and the growth of technology jobs in Vermont. The VTA counts more than 100 software, IT, and other businesses and entrepreneurs as members. Mr. Couture also manages communications and analyst relations for IBM’s Microelectronics Division, which includes IBM’s Vermont facility. Greg Kelly was appointed to the Committee as a representative of the Vermont Technology Alliance. Mr. Kelly is the president of TelJet Longhaul, LLC, a Vermont company that has VT LEG #284515 v.3A
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built one of the largest fiber-to-the-premises (FTTP) networks in Vermont. He has 25 years of experience in the Telecommunications, Internet, and Media industries. Lawrence Miller, the Secretary of Commerce and Community Development, was a statutory appointee to the Committee, and represented the Agency of Commerce and Community Development. John Rosenblum is the Governor’s appointee to the Committee. A business leader and technology innovator, Mr. Rosenblum cofounded and served as CEO of a Vermont health sciences software company that was ultimately acquired by Oracle Corporation. He also cofounded and chaired the Clinical Pharmacology community group at the Drug Informatics Association (DIA) and currently serves on the board of the Association of Clinical Pharmacology Units (ACPU).
II. Meetings and Witnesses The Committee held meetings on the following dates and received testimony from the witnesses as indicated: August 21, 2012 Fred Kenney, Executive Director, Vermont Economic Progress Council Sara Teachout, Fiscal Analyst, Joint Fiscal Office Susan Mesner, Economist, Department of Taxes David Bradbury, Executive Director, Vermont Center for Emerging Technologies Greg Voorheis, Senior Grant Manager, Department of Labor Pat Moulton Powden, Deputy Secretary, Agency of Commerce and Community Development (ACCD) September 21, 2012 Timothy Donovan, Chancellor, Vermont State Colleges Phil Conroy, President, Vermont Technical College Sam Andersen, Director, Central Vermont Economic Development Corporation Catherine Renault, Former Board Member, Maine Technology Institute Cairn Cross, Cofounder, Fresh Tracks Capital October 10, 2012 Tom Kavet, Economist, Kavet, Rockler and Associates Jo Bradley, Director, Vermont Economic Development Authority Tom Candon, Deputy Commissioner, Department of Financial Regulation John Cronin, Director, Securities Division, Department of Financial Regulation Thorne Sparkman, Managing Director, Slater Technology Fund (by phone) November 2, 2012 Kathy Murphy, Chief Marketing Officer, ACCD Pat Moulton Powden, Deputy Secretary, ACCD John Fischer, Deputy Commissioner, Department of Education (Now Agency of Education) VT LEG #284515 v.3A
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December 3, 2012 David Hall, Legislative Counsel, Office of Legislative Council Sara Teachout, Fiscal Analyst, Joint Fiscal Office Five members of the seven-person Committee have considerable professional expertise in the technology industry. Additionally, during the Committee’s discussions, the three members representing the Vermont Technology Alliance (VTA) solicited regular feedback from that organization’s membership. This knowledge and experience, coupled with the Committee members’ own expertise, informed much of the Committee’s discussion and supplemented the formal testimony provided by subject matter experts in complementary fields. In view of the breadth and depth of industry expertise within the Committee, and the feedback received from VTA members, the Committee did not request additional formal testimony from representatives of the technology community. III. Key Areas for Enhancing the Software and IT Economy; Findings and Recommendations Based on the testimony and materials received, on individual members’ and small group research, and on extensive Committee discussion, the Committee identified four key areas in which Vermont state government can take important steps to enhance the software and IT economy. These areas are: 1. 2. 3. 4.
Education; Marketing; Finance; and Collaboration and Networking.
Throughout its discussions, the Committee was cognizant of the state’s budget challenges, and recognized that there is limited capacity for new or expanded appropriations or indirect tax expenditures to support the Committee’s objectives. In recognition of this, the Committee endeavored to offer many recommendations (e.g., policy changes) that would not require direct appropriations. In fact, only a few of our recommendations require specific appropriations or tax expenditures, and we have clearly highlighted those that do. The Committee concluded that it would be unreasonable to expect the State of Vermont to compete with larger states for incentives to relocate large-scale technology businesses to the state. Instead, the Committee concluded that the State of Vermont should focus it efforts on the retention of existing in-state technology businesses, with a new emphasis on strategies and policies to encourage and support the growth and development of new and emerging technology businesses over the long term. With that said, the Committee makes the following findings and recommendations: (1) Education 1. The Committee finds that the STEM incentive program is working successfully and should be continued and expanded to promote competitive hiring in science-related and IT-related fields. Because the current STEM incentive is scheduled to sunset, this would require a new appropriation. VT LEG #284515 v.3A
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2. The Committee finds that Vermont’s K–12 education system does not provide adequate opportunities for students to learn critical skills that are prerequisites for college level study and career preparation in the fields of computer science and hardware/software engineering. This problem is not unique to Vermont, as highlighted in the report “Running on Empty,” published by the Association for Computing Machinery (ACM) and the Computer Science Teachers Association (CSTA). Vermont has the opportunity to make the necessary policy changes to advance our standing in the nation when it comes to hardware and software engineering education. The Committee is concerned that K–12 programs of study in basic computer skills and IT maintenance are often mistakenly assumed to provide appropriate and meaningful preparation for higher education and careers in the hardware and software engineering fields. The Committee is equally concerned about the lack of relevant and meaningful educational opportunities in subjects such as logic, algorithmic and programming theory, and elementary software development – critical building blocks for hardware and software engineering. The Committee recommends that state education policy, as it relates to computer science and technology, be amended and reorganized to differentiate between distinct technology programs of study:
basic computer skills (e.g., use of word processing, spreadsheet, and communication applications) – provide critical skills that nearly all students should possess, regardless of career aspirations; IT maintenance (e.g., hardware/software/networking installation and support) – a program of study most relevant for students on a vocational/two-year degree path; and software/hardware engineering – a program of study that supplements college preparatory math and science courses with theoretical and applied education that is specific to software and hardware engineering (e.g., logic, programing theory, and applied software development)
3. The Committee heard testimony about the success of bridge programs in math and science at the high school level. While encouraged by the success of these programs, the Committee is concerned that many students entering college are not suitably prepared in the fields of math and science. The Committee recommends further investment in scholarships and dual enrollment for STEM courses. 4. The Committee finds that the K–12 education system does not do enough to expose high school students to the career opportunities that exist in the various technology fields, or the practical application of math and science education relative to these career opportunities. The Committee recommends that the state take additional steps to promote its existing internship programs in the technology and scientific fields, and to expand these programs to include teachers and guidance counselors. Specifically, the Committee recommends that the General Assembly provide sustainable, permanent funding for the Vermont career internship program. Teachers and guidance counselors should be able to earn Continuing Education credits for these internships. State graduation VT LEG #284515 v.3A
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requirements should be adjusted so that student internships have real value, including the possible replacement of core credit for English, science, and/or math. The Committee further recommends a state-sponsored initiative to encourage local businesses in the scientific and technical fields to go into K–12 schools to develop career awareness. (2) Marketing 1. The Committee finds that Vermont’s tourism industry promotions emphasize Vermont’s rural agricultural and recreation image mostly to the exclusion of Vermont’s technology sector, which reinforces a misconception that Vermont is not “tech friendly.” The Committee recommends that the Department of Tourism and Marketing promote Vermont’s technology industry and opportunities to both in-state and out-of-state audiences. 2. The Committee further recommends that the Department of Tourism and Marketing co-promote Vermont’s technology industry with other marketing efforts. (3) Finance 1. The Committee recommends that the state adjust language in state contracts so that the state shares intellectual property (IP) rights developed under a state contract with the contractor if the contractor is a Vermont-based company, ensuring the state has the right to use the IP and the contractor has the right to develop it commercially. Such arrangements could include some form of royalty consideration for the state, an approach that could not only save the state upfront development cost, but also provide the opportunity for future revenues (for the state). 2. The Committee finds that there is great potential for the state to conduct business with Vermont-based technology companies, but it remains difficult and complicated for smaller Vermont-based companies to do business with the state, often deterring these companies from bidding on state contracts. The Committee recommends that the state’s procurement process be improved to offer more streamlined opportunities for Vermont businesses to conduct business with the state. 3. The Committee finds that the financing needs for small technology companies are very different from traditional financing requirements of capital-intensive “bricks and mortar” businesses with expensive real estate, machinery, and equipment. In contrast, payroll is often the greatest expense of many technology companies, but without collateral, working capital presents a higher risk that is more difficult to finance. These companies need access to working capital and will benefit most from financial incentives tied to employment. Additionally, small technology companies (under $5M revenue) have significantly fewer opportunities for investment than larger ones and therefore the “but for” clause within the VEGI program is much more likely to be true with small technology companies who have significantly less access to bank loans and angel/venture investments. VT LEG #284515 v.3A
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The Committee recommends that the VEGI program be modified to make it more accessible and less burdensome to use for smaller technology companies, which could be accomplished by simplifying the documentation required under the “but-for” clause. For example, a Vermont-based business with under $5 million in annual revenues adding 10 or fewer employees in any given year could use a streamlined version of the “but-for” test. The Committee also recommends that funding for first-loss funding and loan guarantees through VEDA be replenished. The Committee further recommends that state law be changed to provide preferential treatment for capital gains that are reinvested in Vermont technology companies, with the goal of providing incentive for greater investment of private capital into these higher risk ventures. 4. The Committee finds that many successful technology companies start from very humble beginnings – in a garage, a spare bedroom, or even a college dorm; oftentimes they start as a side-business. In the infancy of these small companies, when revenues are often meager (e.g., a mobile application might only generate a few hundred to a few thousand dollars), Vermont’s $250 Business Entity Tax can be excessive. The Committee recommends that state law be amended to eliminate the Business Entity Tax for the first three years of the life of the business organized as a pass-through entity. 5. The Committee finds that employment in the technology industry is fluid and the use of contract resources pervasive. The Committee recommends that Vermont statutes be amended to provide a clear safe harbor provision for the potential employee misclassification of independent contractors in the software and IT sectors. 6. The Committee finds that the Vermont Center for Emerging Technologies (VCET) is working well and provides high value for Vermont’s software and information technology industry. (4) Collaboration and Networking 1. The Committee finds that networking organizations help foster a technology-friendly environment in the state and support technology start-ups, encourage established businesses to stay in Vermont, encourage a strong tech industry support infrastructure (lawyers, investors, accountants, etc.), and encourage local students to pursue technology careers in Vermont. Since volunteers perform much of the work within these organizations, financial support is very cost effective. The Committee recommends that the state increase funding and provide other appropriate support to Vermont-based technology organizations, industry networking and trade shows, and Angel Investor networking. 2. The Committee finds that machine readable state information would encourage local developers to create software applications that would allow Vermonters to access easily the data on line, would encourage Vermont’s technology innovators, and would demonstrate that the Vermont state government is technology friendly. The Committee recommends that state agencies take VT LEG #284515 v.3A
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necessary steps to make state-collected data more readily available for consumption in machine-readable format. 3. The Committee finds that regional incubator spaces and shared working environments provide valuable networking opportunities that promote new businesses. Many Vermont technology success stories grew out of an incubator space. The Committee recommends that the state authorize one property tax exemption to be awarded to a recipient designated by the regional development corporation in each region to support a regional incubator space during the recipient’s first five years of operation.
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