January 13, 2012

Refocused Economic Development: Less Smoke, More Fire

By: Daniel H. Levine, Principal, MetroCompare

Source: Area Development Online

Economists predict that slow economic growth, high unemployment, and stagnant incomes for a majority of Americans will be the economic norm for at least the next several years. Outside of a few gateway communities like New York City, Washington, or San Francisco, the pace of corporate real estate remains anemic.

With a weak labor market, uneven commercial real estate market, and projections of slow to modest economic growth for years to come, there is little reason to believe that the next few years will look a whole lot different from the past couple of years in terms of corporate relocation, foreign direct investment, or economic development.

Nevertheless, many communities and businesses have been doing very well recently (especially those connected to technology or energy); and many more are treading water or growing ever so modestly. Economic development programs that target a broader swath of companies, focus more on collaboration rather than competition, and concentrate benefits on the people and places where they are most needed will be better able to support businesses and communities in locations where economic growth is not happening quickly enough. Should our federal policy paralysis ever end, better state and federal policy and program alignment would make these same strategies that much more effective.

Slowing the Interstate Competition for Jobs
One of the most pronounced post-recession economic development trends has been the explosive growth in the interstate competition for jobs. Two main forces are fueling this accelerated competition.

First, there are simply too few new projects in the pipeline to come anywhere near close enough to creating a sufficient number of new jobs. Consequently, state and community leaders feel tremendous political pressure to compete for those projects that do come along.

Secondly, as the competition has heated up, many more states have started to make incentives available to “retain” companies that are threatening an out-of-state move. New Jersey and possibly Illinois have become extreme examples of states where it is now arguable that more discretionary incentive dollars are being awarded to companies threatening to leave the state than are being awarded to those that are actually choosing to come.

Subjecting state discretionary incentives to corporate federal tax is one way to reduce the (zero-sum) competition between the states. (See “It’s Time to Referee Incentives and the Interstate Competition for Jobs,” Levine, State Tax Notes, November 29, 2010). After all, why should taxpayers in one state be asked to subsidize another state’s attempt to lure their jobs away (as is the current situation in federal taxation)? But whether the IRS steps in to impose some discipline or states simply find themselves fiscally exhausted by the competition, economic development programs that target more businesses and more workers, particularly those in distressed communities, will likely prove more effective at promoting real economic change than will the current reliance on incentives to chase one project after the next.

Developing Talent Through Regional Consortiums Almost every community with a major research university is promoting some form of a university-business partnership. In most cases, these “university-centric” partnerships are designed to help entrepreneurial faculty commercialize patents developed on-campus.

“Regional-centric” partnerships designed to support those companies in the community that are the bedrock of the regional economy are much more rare. Two outstanding examples of regional-centric partnerships are the Center for Manufacturing Excellence created jointly by the University of Mississippi and Toyota Motor Corp.; and the State University of New York at Albany’s College of Nanoscale Science and Engineering, a partnership with a consortium of semiconductor partners that includes IBM, Global Foundries, and SEMATECH.

These partnerships do more than simply incubate new start-up businesses. They are designed to encourage enormous new local investments in plant and equipment by preparing a work force that is specifically trained in the new technologies expected to be deployed in local plants and labs. It is worth noting that in these two examples, funding for the partnerships came almost exclusively from the state (through its university) and its local business partners (with little to no federal contribution).

On the other hand, community colleges have a long tradition of working with local businesses to develop talent, and in these cases federal funding is often critical. Federal training dollars are usually awarded to companies working in a regional consortium that includes a local college and other local businesses. One obstacle to obtaining federal training dollars is that they often target a specific industry (lately “green technologies”) as opposed to simply favoring consortiums that have the greatest potential to help the greatest number of workers. Nevertheless, for many companies (especially those in manufacturing), federally supported regional consortiums can be an effective way to reduce training and recruitment costs.

Attracting Talent Through Immigration Policy
The overall job market might be weak but some technology and engineering skill sets are in short supply. Often companies respond by opening overseas locations where talent with these skills can be recruited. Some technology industry leaders have argued that a better alternative would be for the United States to allow “entrepreneurial visas.”

Entrepreneurial visas would allow easier access to the United States for those applicants who intend to open a new business here and have already secured binding financial commitments from venture capitalists or other investors to finance the business that will be created should the visa be granted. This concept is a variation of an approach already proven in the Canadian Provincial Nominee Program through which visa applicants with difficult-to-recruit skills (in some provinces including entrepreneurial skills) receive expedited visa and citizenship processing from the federal government.

While changes to immigration policy would surely be helpful, there are some ways in which states and businesses can do a better job at tapping immigrant investor dollars available from existing programs. For example, under the EB-5 immigrant investor visa category, visas are available to applicants willing to invest a minimum of $500,000 in a business that will create at least 10 new jobs in a regional center (as designated by the INS). Obtaining designation by the INS for a regional center provides a great opportunity for businesses and states to work together to attract new talent and investment dollars — particularly when a mechanism is provided to make it easier for multiple EB-5 visa applicants to pool investments into a single project. In addition to attracting EB-5 investment dollars, collaborative relationships with the business networks created within immigrant communities can serve as a useful conduit to attracting potential foreign direct investment.

Distressed Workers
Most state economic development programs emphasize the recruitment of projects with high average wages, despite the fact that the overwhelming percentage of adults in their communities would not be qualified for the jobs expected to be created. No doubt every community envisions itself as the next high-tech, life sciences, or advanced manufacturing center. But the reality is that 72.1 percent of the U.S. adult population has never earned a degree from a four-year college or university. In Massachusetts, our most educated state, more than 60 percent of adults do not hold a bachelor’s degree; and among the most educated age group in the country (those below the age of 45), 64 percent have not earned a bachelor’s degree.

Economic development ought to reflect a community’s aspirations. But it must also be grounded in reality. Very few states, for example, give favorable weighting in credits or incentives to projects that hire distressed or underprivileged workers. In fact, in many states such projects are ineligible for any incentive award whatsoever (e.g., those states that require that incentive-eligible projects provide above-average wages or restrict awards to only high-paying targeted industries). In many respects, this is completely backwards from what is most needed. After all, jobs that do not require a four-year degree are precisely those most at risk of going overseas.

And it’s not just states that ignore jobs that are suitable for the majority of the population without four-year degrees. With the exception of the Workforce Opportunity Training Credit (WOTC), almost no assistance comes from the federal government either. Better alignment between state job hiring tax credits and WOTC (which is administered by states) would go a long way toward providing companies with a meaningful incentive to hire distressed workers.

Leveraging Anchor Institutions

One of the most important sources of employment opportunities for distressed workers are anchor institutions (such as hospitals or universities) that are located in a distressed community. Employment opportunities created by an anchor institution might be direct, or just as importantly, might be created through a redirection of the institution’s vendor contracts.

The Initiative for a Competitive Inner City (ICIC) cites the example of the University of Pennsylvania doubling its local Philadelphia vendor contracts to $100 million annually. (See the ICIC’s report on “Anchor Institutions and Urban Economic Development,” June, 2011.) Fortune 500 companies can be anchor institutions as well. Campbell’s Soup Co. (Camden, N.J.) and Whirlpool Corp. (Benton Harbor, Mich.) were each granted innovative development rights by state economic development officials to bring much needed real estate development onto or near their corporate campuses (each of which is located in a distressed community).

Leveraging the real estate development potential of anchor institutions would be greatly enhanced if the rules for issuing tax-exempt private activity bonds were relaxed for projects that benefit both private and not-for-profit parties (when the project is located in a distressed community). For example, perhaps the percentage of private activity allowed in a tax exempt bond that finances a project benefiting both a private company and a not-for-profit could be substantially increased from the current cap of 5 percent (for a project’s private activity use), provided that the project is located in a specially designated distressed community (such as a federal empowerment zone).

State economic development agendas cannot influence the pace of the national economic recovery, but they can make a big difference in helping businesses and communities leverage their existing toolboxes more effectively. Less focus on the zero-sum competition between the states — and a lot more help from the federal government in terms of getting its policies better aligned with state economic development challenges and programs — would certainly be a welcome change as well.