BOSTON (SHNS) – Massachusetts historically has not had too much need to compete for federal funding, which left it without the same kind of “muscle” that other states are deploying to take advantage of new grant opportunities, the Healey administration’s economic development chief said Wednesday.
In a presentation that touched on the business climate, migration patterns, and the Silicon Valley Bank collapse, Housing and Economic Development Secretary Yvonne Hao told lawmakers that Massachusetts needs to get up to speed with other states better positioned to seize a “once-in-a-generation opportunity.”
Passage of the CHIPS and Science Act and other major spending bills in Washington, D.C. has made massive tranches of federal aid available, and Hao said other states have been “very aggressive” in their pursuit of grants in “a very short window.”
“We’ve been lucky in the past that we haven’t really needed to ask the federal government for a lot, so we don’t have this muscle in the same way as other states,” Hao told the Joint Committee on Economic Development and Emerging Technologies. “We are at risk of losing out on this opportunity. I think it’s really important, and the governor, I think, is a very competitive person — we need to build this muscle quickly to get at least our fair share if not more.”
Governors and the state’s all-Democrat Congressional delegation over the years have boasted about Massachusetts hauling in its fair share of federal aid, which is reflected annually as a big source of revenue in the state budget. But states compete for discretionary aid in an evolving political climate.
As Gov. Maura Healey has done in recent weeks, Hao singled out microelectronics and semiconductors as an industry primed for growth in Massachusetts if the state can take advantage of funding available in the CHIPS and Science Act.
Bringing more semiconductor manufacturing to the United States, Hao said, is also a “national security issue” since the technology plays a key role in intelligence systems, drones, and other military technology.
Hao recounted that a coalition of northeastern states led by Massachusetts and the Massachusetts Technology Collaborative submitted a grant application in February for up to $400 million toward microelectronics research, manufacturing, and workforce skills development.
“This is an area where I think we should win. This plays to our strengths and our history,” she said. “We will not know about this one until probably the summer is my guess, and I will be deeply disappointed if we don’t win at least something here.”
Lawmakers approved $125 million in state matching funds for federal grant contests as part of a spending and borrowing bill Healey signed on Wednesday.
Other state agencies, particularly in the transportation sector, have struggled to win federal dollars for major projects. The Biden administration rejected a pair of grant applications for replacement of the Cape Cod Bridges — before President Joe Biden himself recommended up to a $600 million commitment toward the project in his federal budget proposal — and a joint state-city of Boston request for money toward a massive infrastructure project in Allston.
Winning federal dollars that can make Massachusetts a linchpin of burgeoning industries is especially important, Hao said because the state faces significant economic headwinds.
“When you first look at our state, it kind of seems like we’re doing fine — we’re great, other states envy us. But when you start to dig under that, as I mentioned, you look at the underlying trends, we’re not doing fine,” Hao, who was an operating partner at Pillar Ventures and co-founded investment firm Cove Hill Partners, said. “My own business experience shows that by the time you realize you’re losing, it’s kind of too late. So this is a time now to make sure we fix these issues.”
Driven by potent costs of living and the growing emergence of remote work, Massachusetts now ranks as one of the states with the most outward migration of residents decamping for other locales, according to Hao. Last year, she said, an average of 1,100 residents left Massachusetts per week.
“It’s a crazy statistic,” Hao said. “When you dig into the numbers, the people leaving, there are some retirees, but a lot of the people leaving are normal families. They’re young graduates. They’re exactly the kind of people we need here in Massachusetts for our future. That’s not a good statistic.”
Healey has made affordability and competitiveness themes of her campaign and early months in office. She wants to split Hao’s secretariat into two separate offices, one focused on economic development and the other focused solely on housing, to devote more resources to the statewide housing crisis.
The governor is also pressing a package of tax relief that would cost nearly $1 billion per year, combining a new $600-per-dependent credit for families with new tax breaks for renters and seniors, a short-term capital gains tax rate reduction from 12 percent to 5 percent, and a threefold increase in the estate tax threshold to $3 million.
Some Democrats and progressive advocates have slammed the capital gains and estate tax proposals as an unnecessary giveaway to the wealthy, and business groups have argued instead that those measures are necessary to make Massachusetts a better, more enticing environment for employers.
Hao suggested to lawmakers, who will get a chance to make additions or subtractions to Healey’s tax bill, that Massachusetts only needs to target the middle of the pack when it comes to the state’s overall tax competitiveness.
“We don’t need to be the best on taxes. We used to be around 34th — that’s kind of the perfect spot for us because we have so many other strengths,” she said, referencing The Tax Foundation’s business tax climate index. “We’re going to drop to 46th. That is not a good place for us. We don’t need to be the last and worst on taxes. It’s just not helpful for us.”
Another issue still on Hao’s radar is the upheaval in the banking sector in the wake of the Silicon Valley Bank collapse.
Hao said administration officials were able to convene a wide range of stakeholders — including leaders of banks that compete with one another — and craft a plan within hours of the news about Silicon Valley Bank.
The firm’s collapse had a particularly profound impact on Massachusetts, both because it was a key player in the innovation economy popular here — Hao said a startup where she served as COO and CFO, PillPack, used SVB as its banker — and because it previously acquired Boston Private.
Hao said intervention by the Federal Deposit Insurance Corporation helped steady the situation, but she forecast “longer-term impacts here in Massachusetts.”
“We are not out of the woods. There is just a lot of volatility and uncertainty in the broader financial services area,” Hao said.
She said regional banks like Cambridge Trust and HarborOne in the “messy middle” have experienced sizable outflows of money and warned of an “arctic winter” on the horizon for the innovation economy.
The upheaval could make investors, limited partners, and the like more wary of putting money into venture funds, which would then cause venture funds to think twice about investing in startups, Hao said.
“For all the startups we have here in Massachusetts, I think the seed money probably will be okay, but as you look to raise your next rounds of funding, it’s going to be very challenging. In the past, if you couldn’t raise a round of funding, you always had venture debt as a solution — ‘we’re not going to do equity, we’ll do debt to get us through to hit some more milestones, then we’ll raise our next round,'” Hao said. “Venture debt’s going to be very challenging because Silicon Valley Bank was the leader in venture debt. And so again, this is a national or global phenomenon, but we are disproportionately impacted in Massachusetts because innovation is such a key part of our state.”
“This is something we need to think creatively about as part of our medium-term economic development plan,” she added.