GOOD JOBS, STRONG INDUSTRIES, A BETTER PENNSYLVANIA: Towards a 21st-Century State Economic Development Policy

Authors: 
Michael Wood
Authors: 
Stephen Herzenberg
Publication Date: 
March 16, 2010
Attachment: 
Attachment: 

Media Coverage of This Report

View video from our March 16 Capitol press conference

The Big Picture of This Report

Pennsylvania lawmakers today face two challenging and difficult-to-reconcile pressures: a) a deep recession that has eroded state revenues, leading to careful scrutiny of all state spending and deep cuts in some programs, and b) high unemployment rates that have brought new urgency to state efforts to boost job creation. In the context of these twin pressures, this report contains an overview and assessment of current programs in Pennsylvania that aim to create jobs and promote economic growth. The report suggests that today’s economy, together with a gubernatorial campaign and transition, provide a chance for policymakers to step back from 50 years of incremental expansion of state economic development programs, and to implement a strategic updating of Pennsylvania’s approach to stimulating economic growth. This new approach would be based on three key principles:

•    First, instead of handing out checks to lure new businesses to the state (or retain existing ones), a dominant practice to date, Pennsylvania should strengthen its efforts to grow its own companies by investing in the public goods of a 21st-century economy. These 21st-century public goods start with education and traditional infrastructure but also include technological infrastructure and amenities, cultural assets, and natural endowments that make Pennsylvania an attractive place to live and work. Today’s public goods also include institutions that support specific industry sectors, such as training partnerships and sector-specific innovation centers that build on Pennsylvania’s higher-education institutions.

•    Second, any future distribution of subsidies and tax breaks to individual businesses must be accompanied by commonsense accountability. Since most companies don’t receive special subsidies from state or local governments, those that do must comply with transparency requirements, pay decently, and deliver on jobs and wages promised.

•    Third, Pennsylvania should focus its job-creation dollars on already-developed rural towns, innerring suburbs, and cities, where new jobs will rely on existing infrastructure and be accessible to families and communities that most need good jobs.


These three principles, basic to strategically updating the state’s approach to economic development, are hardly controversial. In fact, they are embraced by the most respected economic-development practitioners and academic scholars who study regional economies, by conservative advocates of transparent and accountable government as well as liberal critics of sweetheart deals for politically connected corporations, by leading legislators in both parties and the economic development agencies of Pennsylvania state government, by advocates for low-income neighborhoods in cities, and by proponents of open-space preservation in affluent exurbs. These three principles build on accountability improvements already made by Pennsylvania’s lead economic development agency, the Department of Community and Economic Development (DCED). Now is the time to put these three principles more forcefully into practice, ensuring that Pennsylvania will enjoy a higher return on its future investment in job creation.

Overview of Pennsylvania Economic Development Programs

Pennsylvania spent over $1 billion on economic development (defined broadly) in 2008–09, the last year before revenue shortfalls led to deep program cuts. (Our exact definition of “economic development” is described in the “Report Scope and Methodology” section of this report.) Drawing on scholarly research that examines different ways other states promote economic growth, we divide this $1 billion total into four components: Traditional Subsidies; Grow-Your-Own Programs; Regional, Community, and Industry Programs; and Discretionary Subsidies. While the allocation of individual programs into these four categories is not an exact science, the exercise nonetheless provides a better analytical sense of where Pennsylvania puts its job creation dollars than does either looking at the grand total by itself or looking at the laundry list of 89 separate programs. Breaking the total into four categories also allows us to see which components have felt most keenly the budget-cutters’ scalpels over the past two years.


1.    Traditional Subsidies induce new facilities to locate in Pennsylvania or, in some cases, help retain existing jobs. We estimate that these subsidies accounted for nearly $250 million of the $1 billion total in FY 2008–09.
2.    Grow-Your-Own Programs provide assistance to homegrown Pennsylvania businesses and accounted for about $215 million annually, on average, for the three years ending in 2008–09. Grow-Your-Own Programs pay for a range of activities in the life cycle of a company, from the initial generation of ideas with commercial potential, to the incubation of new companies, to the further growth of new start-ups. For mature companies, Grow-Your-Own Programs may help pay for the improvement of company processes or the development of new marketing strategies and identification of new markets.
3.    Regional, Community, and Industry Programs account for 44% of the $1 billion total. These subsidies pay for regional capital projects (e.g., construction of convention centers, hospitals, or new stadiums); for community improvements (such as subsidies for upgrading Main Street and Elm Street); and for subsidies to groups of companies (e.g., grants to industry training partnerships). Assistance in this category operates at a broader level than does a subsidy to an individual company.
4.    Discretionary Subsidies, our final category of “other” DCED programs, accounted for $145 million in FY 2008–09, and consists largely of discretionary grants—sometimes criticized as “Walking Around Money” or WAMs—that often go to local nonprofits and fire departments.

With state revenues declining during the recent recession, the programs analyzed here absorbed overall cuts of about 28% in the FY 2009–10 state budget. Looking within our four categories and at the entire decade from 2001–02 to 2009–10, we found the following trends:


•    Until recent cuts, spending on Traditional Subsidies grew the most in the last decade, from $115 million to $260 million at its height. The deal-making core of Pennsylvania’s economic development approach remains extremely powerful. The tax credit for making films in Pennsylvania explains part of this increase.
•    Grow-Your-Own Programs increased from the FY 2001–02 to 2008–09 period, but declined by $100 million in 2009–10, to below the level at the start of the decade. Pennsylvania’s two “flagship” Grow-Your-Own Programs—the Ben Franklin Technology Partnership and the Industrial Resource Centers—have seen cuts from a combined annual total of at least $65 million for five years leading up to FY 2008–09 to the governor’s request of only $27 million in 2010–11.
•    Changes each year in funds for Regional, Community and Industry Programs are driven partly by annual allotments for capital projects to the Redevelopment Assistance Capital Program (RACP), which fluctuated between $163 million and $284 million in the last decade. Regional, Community, and Industry Programs spiked most with the implementation of the state’s Economic Stimulus in 2004–05. This stimulus included additional RACP funds plus two new programs subsidizing business-site and real-estate development—Business in Our Sites and Building PA. While the 2009–10 budget cut most Regional, Community, and Industry Programs, spending on the category as a whole did not decrease due to a $100 million increase in RACP.
•    In the FYs 2006–07 and 2007–08, there was an increase in discretionary subsidies from around $100 million to $158 million. These grants were then virtually zeroed out in the 2009–10 budget.
•    In part because tax credits don’t increase state spending (but instead cut state revenues), there has been a substantial increase in the use of tax credits to promote job growth over the past decade. Tax credits for economic development jumped from less than $100 million in FY 2001–02 to a peak of $260 million in 2008–09. This jump contributed to increased scrutiny from the state legislature in 2009, including performance audits by the Legislative Budget and Finance Committee, resulting in a $130 million cut to tax credits in the 2009–10 budget.
 

Targeting of Traditional Subsidies

Nationally, best economic-development practice emphasizes the importance of targeting Traditional Subsidies based on industry (by asking: would the new business fit with the regional economy?), community (by asking: would the business site rely on existing infrastructure, and, is it in an area of high unemployment or accessible to unemployed and low-income workers?), and job quality (by asking: what does the company pay, and does it provide healthcare benefits?).
This report examines to what extent nine Pennsylvania Traditional Subsidy Programs target their dollars based on industry, community, and job quality. We found:


•    Good data is not routinely collected and publicly disclosed on how well programs target Traditional Subsidy dollars to good jobs, to industries that make sense, or to places with existing infrastructure accessible to high-unemployment communities.
•    Nearly a decade ago, painstaking collection of data by Keystone Research Center indicated that significant numbers of subsidies went to companies with low-quality jobs or business sites in outlying communities where they could reinforce sprawl.
•    Over the past decade, targeting of subsidies based on industry, community, and job quality may have increased. We base this tentative conclusion on interviews with economic development policymakers and practitioners, analyses of program guidelines, and the Rendell Administration’s 2005 adoption of principles (the “Keystone Principles”) that endorse investment in good jobs and older communities.
•    Even now, however, a majority of the nine programs reviewed do not give high priority in program guidelines to high-unemployment communities or to communities close to public transit.
•    None of the program guidelines examined contain strong job-quality standards that would ensure promotion of good jobs with public dollars. At best, program guidelines require wages equal to at least one-and-a-half times the federal minimum wage of $7.25 per hour (i.e., $10.88 per hour).

Subsidy Accountability and Transparency

This report examines three dimensions of accountability once companies receive subsidies: public disclosure of basic information on projects funded; monitoring of companies that receive awards; and so-called recapture provisions (i.e., do companies that fail to deliver promised jobs and wages repay subsidies?)
•    At present, Pennsylvania has no public disclosure requirements that mandate public reporting on whether businesses that receive subsidies actually create jobs and, if they do, what the wages and healthcare benefit coverage of those jobs are.
•    In response to recent performance audits by the Auditor General and the Legislative Budget and Finance Committee, Pennsylvania has strengthened its monitoring of companies that receive subsidies—for example, by auditing the accuracy of some company reports of how many jobs projects create. DCED also acknowledges the need for greater monitoring in general but does not currently have the resources to create an adequately staffed monitoring unit.
•    The Opportunity Grant program has more than doubled its recapture of subsidy money from companies that do not deliver on promised jobs—to 30% in 2007 from 13% between 2000 and 2005. No public information exists on whether recapture has increased more generally.

Return on Investment of Grow-Your-Own Programs

The return-on-investment in Traditional Subsidies is very difficult to estimate, because no one can answer the “but-for” question—i.e., how many jobs businesses might have created without a subsidy. As a result, the most that is ordinarily done to measure the “performance” of Traditional Subsidy programs is to add up all of the (self-reported) jobs at business sites receiving assistance. By contrast, Grow-Your-Own Programs have been the subject of somewhat more rigorous performance evaluations. These evaluations have found that Grow-Your-Own Programs have a high return on investment. For example, a recent study of the Ben Franklin Technology Program (one of Pennsylvania’s best known Grow-Your-Own Programs) by the Economy League of Greater Philadelphia concluded that Pennsylvania’s Ben Franklin Technology Program increased state tax revenues by $517 million from 2002 to 2006, compared to a state investment of $140 million over those five years.
Another critical point to keep in mind when the state decides how much to invest in Traditional Subsidies vs. Grow-Your-Own Programs is that most new jobs result from the expansion of businesses already in the state. For example, a 2010 Good Jobs First study found that, over a period of 16 years in a broadly defined group of high-tech industries (including advanced manufacturing), net job growth of in-state companies was 28 times larger than net movement of jobs across state lines. (See Growing Pennsylvania’s High-Tech Economy, online at www.good jobsfirst.org.) In sum, growing your own companies is where the action is and industrial attraction is not.

Conclusion

Reinventing Pennsylvania’s approach to economic development, with the goal of maximizing return on state investments, will take a joint effort by the state’s entire economic development team—professionals in the field as well as legislators and the executive branch. The final section of this report details six recommendations to help the state get started:{1}
1.    Better Target Traditional Subsidies: Pennsylvania has taken tentative steps away from the 50-year-old idea that “any job is a good job” and toward the idea that businesses that receive subsidies should meet criteria based on job quality, on whether recruited businesses make sense for the regional economy, and on whether the jobs will be in the right place. To move further in this direction, DCED should engage economic development practitioners in the development of practical ways to give additional emphasis to community, job quality, and industry. Would practitioners, for example, favor block-granting portions of Traditional Subsidy dollars to counties or multicounty regions that submit strategic plans outlining effective targeting? DCED, the next gubernatorial administration, and the legislature should also give consideration to setting aside a portion of Traditional Subsidies for specific communities (as done by Montgomery County in a new county economic development program).
2.    Improve Transparency and Public Disclosure by Making the “Investment Tracker” a More Functional Tool for Analysis: The Pennsylvania Department of Community and Economic Development’s “Investment Tracker” website (http://www.dced.state.pa.us/investmenttracker/) reports on more than 240 state programs. In a 2007 report by Good Jobs First, Pennsylvania was ranked 12th among the states for on-line information about job subsidies (only 23 states had any online reporting). But there are critical gaps in the Investment Tracker reports: For example, information is inadequate or lacking on wages and benefits, on where the money is applied geographically, on the industry of the recipient company, and on whether companies actually deliver on promised job creation. The Tracker’s format also makes it difficult to download the mountain of (flawed) information into a data set for analysis. Being inundated with too much data can be as disempowering as having too little. To make the Investment Tracker a more functional tool, the state should improve its disclosure requirements and website to fill these data gaps and fix this download flaw. DCED or another entity should also be provided with resources necessary for better monitoring once companies receive subsidies.
3.    Create a Unified Development Budget: To complement an enhanced deal-specific disclosure system, we also recommend a Unified Development Budget (UDB), an annual report to the state legislature which catalogs and analyzes all forms of state spending for economic development, including tax breaks. Similar to the present report—which is a template for a Pennsylvania UDB—UDBs are intended to enable legislators to see the big picture, as well as the patterns and trends within it, making it easier to set economic development priorities via the budget.
4.    Enact Economic Development Accountability Legislation: Since FY 2003–04, a bipartisan group of Pennsylvania lawmakers from both chambers of the General Assembly have supported legislation to strengthen job quality standards and accountability (public disclosure, monitoring, and recapture of subsidy money if companies don’t deliver promised job creation) of Traditional Subsidies in Pennsylvania. With the state facing tight revenue constraints and the public concerned that lack of transparency opens the door to politicized distribution of business subsidies, now is the time to enact this accountability legislation.
5.    Grow-Your-Own Businesses Rather Than Recruit From Other States: Pennsylvania should use this time of budget cuts to shift its economic development portfolio toward Grow-Your-Own and strategic Regional, Community, and Industry Programs (which also grow Pennsylvania’s own companies). Generous budgets for Traditional Subsidies play into the hands of site-selection companies that stoke the war between the states and extract public money even when companies have already made up their mind to move or to stay. From the perspective of economic theory, moreover, it is easier to justify investments in Grow-Your-Own and Regional, Community, and Industry Programs. In the case of Grow-Your-Own Programs, the private sector underinvests in innovation because companies cannot capture all of the benefits of their innovation. Some of these benefits spill over to other (often nearby) businesses. This market failure creates a strong rationale for the public sector to invest. Regional and community assets also are appropriate targets for public investment because they are “public goods” that benefit many businesses and individuals. By contrast, handouts to individual companies too often deliver only private benefits with little or no public benefit.
6.    Change the Business Model and Mindset of Economic Development Organizations: Upton Sinclair once said, “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.” This statement captures, in part, the challenge of updating the state’s approach to job creation when economic development organizations make money cutting Traditional Subsidy deals. A partial answer might be to give economic development organizations a stake in effective “Grow-Your-Own” approaches, including initiatives to support innovation in regional industry clusters. The paragraph below suggests one way to do that.


At present, even though we live in a global, knowledge-based “network economy,” the state of Pennsylvania invests very little in helping industry clusters respond to global competition. The state could remedy this shortfall by adapting to the economic development sphere the flexible approach the Department of Labor and Industry uses to distribute Industry Partnership grants.{2}  While Industry Partnership grants support industry-specific training, an analogous economic development initiative could provide grants for upgrading technologies, developing new products, exploiting new markets, or otherwise improving performance to head off foreign competition. To give economic development organizations a stake in this process, they could be eligible—along with industry associations and Industry Partnerships—to submit proposals for such grants. (In several parts of the state, economic development organizations have staffed Industry Partnerships.)


Another way to change the mindset of economic development practitioners might be to block-grant to regions resources from all economic development programs—Traditional Subsidies, Grow-Your-Own Programs, and Regional, Community, and Industry Programs. The reason a broad block grant might help shift the balance away from Traditional Subsidies is that it would confront regions with “opportunity costs” when they offer big subsidies—i.e., they would have less money from their block grant to spend on industry cluster or strategic community development programs. Today, when a community helps a newly recruited company win state subsidies, the region does not lose any resources for other economic development initiatives.


Looking forward, Pennsylvania is recognized nationally as a leader in economic development policy and practice. The state has a richer and more balanced repertoire of economic development programs than many states. The state also has some of the nation’s most respected Grow-Your-Own Programs. Now, in the wake of the Great Recession, Pennsylvania has a chance to step to the forefront again. It has a chance to become the first state to implement a comprehensive 21st-century state economic development policy. The state’s future prosperity and quality of life depend on it.


{1}    These recommendations, especially numbers 2 and 3, borrow liberally from the recommendations of Greg LeRoy, (2005). Growing Pennsylvania’s High-Tech Economy: Choosing Effective Investments. Washington DC: Good Jobs First.
{2}    This suggestion was triggered by a comment of State Representative Scott Boyd of Lancaster that the applicability of the Industry Partnership model extends beyond workforce development to economic development as a whole. The suggestion was made in February 24, 2010, hearings in the Pennsylvania House Labor Relations Committee. For more on the state’s Industry Partnerships, see http://www.portal.state.pa.us/portal/server.pt?open=514&objID=575072&mode=2