Ky. lawmakers balk at plan to hand $8.5 million to nonprofit created by state officials

FRANKFORT, Ky. (WDRB) – Gov. Matt Bevin’s economic development cabinet wants to give an $8.5 million no-bid contract to a new nonprofit organization whose top officer is a high-ranking cabinet employee and whose board includes the recently departed secretary of the cabinet.

But legislators on Tuesday balked when asked to approve the contract, citing concerns about funneling state money to what one lawmaker called “an off-the-books entity.”

“This is $8.5 million. Who is going to have ownership of those funds? Who is going to have oversight that they are spent appropriately?” said state Sen. Stephen Meredith, R- Leitchfield, chairman of the legislature’s contracts review committee.

At issue is a nonprofit organization called Commonwealth Center for Commercialization Inc., which state officials refer to as C3.

State records show it was formed Oct. 25, 2018 with initial board members including Terry Gill, then the secretary of the economic development cabinet, and Brian Mefford, a high-ranking cabinet official.

Mefford, whose title with the cabinet is executive director of the Office of Entrepreneurship and KY Innovation, is also identified incorporation records as “president” of C3 – a position he said on Tuesday is unpaid and temporary.

In remarks to lawmakers and to a reporter following the meeting, Mefford said cabinet officials used state resources to form C3 as an alternative to a longtime state contractor, the Lexington-based Kentucky Science and Technology Corp., or KSTC.

For nearly two decades KSTC has received “most” of the work associated with some state entrepreneurship and innovation programs thanks to a 2001 state law, the Kentucky Innovation Act, Mefford said. The law mandates that the state work with a “science and technology organization” to administer the programs.

“We wanted to be able to take a step back and say, there has been one entity for 20 years. Maybe there should be two. Maybe there should be options,” Mefford told a reporter.

C3 is “collaborative partnership” between the cabinet and the state’s universities, with goals that include helping more university research become commercial ventures, he told lawmakers.

Mefford said he is the “interim” president of C3 and that the organization will conduct a national search for a permanent leader.

Mefford said C3 is independent of the cabinet but acknowledged it has been propped up using state staff and money.

For example, in May C3 circulated a 7-page solicitation for an “integrated marketing communications engagement” that directs bidders to submit their proposals to an official at the economic development cabinet, according to a copy of the RFP obtained by WDRB.

“It’s in startup mode. Somebody has to start it,” Mefford told WDRB. “ … We have the ability, and it’s in the early stages here, to provide some staffing support to get legs under this new entity. But long-term the idea is that it operates independently with some oversight (from state officials) at the board level.”

C3’s board is a mix of state government officials and private citizens, according to Kentucky corporation records. Besides Mefford and Gill, who left the cabinet last month, the board includes:

– Aaron Thompson, president of the Kentucky Council on Postsecondary Education

– Ian McClure, executive director of the Office of Technology Commercialization at the University of Kentucky

– Jackson Andrews, managing director of Endeavor Louisville, an entrepreneurial nonprofit

– Startup business expert Wendy Lea, who is also a paid contractor to the Louisville Entrepreneurship Acceleration Partnership, an effort funded with $1.3 million from the economic development cabinet. Lea is also on the board of TechStars, an organization that has a $300,000 consulting deal for the state-funded Louisville initiative, called LEAP.

Mefford acknowledged that the cabinet didn’t open the $8.5 million “memorandum of understanding” it wants to award to C3 to competitive bidding, but he said C3’s subcontracts would be open to competition.

Meredith said during Tuesday’s meeting that he is concerned about the potential for “conflicts of interest” and the lack of visibility into how state money is spent once it’s handed over to an independent organization.

“A new corporation — Who is not to say, ‘We’re gonna pay the CEO a million dollars?,’” Meredith said. “… We have seen it a thousand times in state government. Funds become available, but they really don’t ever hit the target because of mismanagement or misdirection. That’s what really makes me uneasy about this.”

But Mefford told lawmakers that C3 will have “the highest level of transparency and accountability,” including frequent performance reports detailing its use of state money.

He said C3 will follow the same federal rules as all charitable tax-exempt organizations regarding the disclosure of potential conflicts of interest.

Speaking to a reporter, Mefford said there is no formal link between Lea’s work for LEAP, the cabinet-funded entrepreneurial effort, and Lea’s service on C3’s board.

“We are not going to say that they are never seeing each other, but certainly that’s a different effort than C3,” Mefford said.

Lea said by email she was at a conference in Los Angeles and unable to speak to a reporter on Tuesday.

Mefford also stressed that no state economic development officials are being paid, nor will they, by C3.

Asked whether former cabinet officials could be employed by C3, Mefford said, “I can’t predict the future, but there is not a road map for that at this point. We want the best talent we can get so we are going to search nationally.”

After voting down a motion to approve the C3 contract, the committee decided to table the $8.5 million deal until its next meeting in July.

Meredith, the committee chairman, said in an interview that he thinks the arrangement could be approved, but he wants more information about how the money will be accounted for and how conflicts of interest will be managed.

“We want to make sure all of this is done above board and with complete transparency, so we will watch it closely,” he said.