Cuomo’s $1B economic stimulus for region: Promising vision, questionable assumptions

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Gov. Andrew Cuomo’s proposal to invest $1 billion of state incentives in an effort to revitalize the region’s economy is even bolder than the “B as in billion” suggests.

Bold, but potentially flawed.

Cuomo is alone among the nation’s 50 governors in targeting that kind of money at a regional economy.

“To have a governor willing to spend $1 billion in one metropolitan area is truly exceptional these days, given states’ fiscal conditions,” said Greg LeRoy, a national expert on economic development subsidy programs and executive director of Good Jobs First.

Moreover, Cuomo wants to break from current economic development practices in several important ways:

• Targeting development in and near the City of Buffalo, rather than outlying areas, where most major development has occurred the past 25 years.
• Focusing on creating, rather than retaining jobs.
• Putting the state, rather than local economic development agencies and politicians, in charge of earmarking the $1 billion.

The infusion could generate more than 20,000 jobs under a best-case scenario.

That’s provided subsidies are in line with cost-per-job standards used by several economic development programs funded by the federal government that cap aid at $35,000 to $100,000 per job.

Divide that into $1 billion and it works out to 10,000 to some 28,500 jobs. Compare that with subsidies Yahoo received to build a data center in Lockport that opened the fall of 2010 that worked out to $2.1 million per job. That level of subsidy would yield only 476 jobs for the state’s $1 billion.

The key, of course, is how the state targets its $1 billion. While the plan is a work in progress, some aspects of Cuomo’s general approach appear ambitious – at best – and beg a larger question: Is the apparent focus on big-ticket projects the best way to rebuild the region’s economy?

Consider:

• Cuomo wants every $1 of public incentive to leverage $5 of private investment. But recent big-ticket projects, at least locally, are hard pressed to leverage anywhere near that kind of private money.Yahoo’s data center in Lockport cost $150 million to build and equip; property tax abatements, hydropower discounts and other incentives will total a projected $268 million over 20 years. GEICO’s deal to build and equip a $39.6 million facility in East Amherst called for $104.7 million in incentives. Elsewhere in the same office park, Citigroup struck a deal to receive incentives worth $57 million in exchange for a $26 million facility.
• The governor’s focus on big deals – probably more than one but fewer than 10 – coupled with his 5-to-1 investment ratio means Cuomo is seeking deals approaching or exceeding $1 billion apiece. There are only a handful of those sized projects to be had in the entire nation in any given year, much less in Western New York.
• Mega-projects typically require lots of land, but the urban core has few large shovel-ready tracts available. This isn’t regarded as an insurmountable problem, provided the former Bethlehem and Republic Steel sites are deemed acceptable project sites. But a lack of large shovel-ready sites does pose a significant challenge.
• Cuomo has not spoken to what many consider the region’s fundamental economic problems, including a lack of venture capital to fund start-ups and fledgling companies, a shortage of workers with certain skill sets, and the region’s modest level of small, locally owned businesses.

Jeff Finkle, president of the International Economic Development Council in Washington, D.C., said Cuomo’s initiative faces “pretty long odds” as presently construed.

“If you get away from the focus on the really big projects and focus on singles rather than homers, I think he can be successful,” he said.

Kelly Edmiston, a senior economist at the Federal Reserve Bank of Kansas City who has authored several studies on the impact of subsidies, said their benefits tend to be overstated.

“The research suggests using incentives may promote some employment growth, but not much,” he said.

If subsidies are going to be part of the mix, Edmiston said they’re best used to help expansion of companies engaged in business activity considered one of the region’s core strengths, commonly known as clusters.

“Expansion can work out well, but that doesn’t mean subsidies are cost effective,” he said.

The best strategy of all, he said, doesn’t involve attracting companies with subsidies, but rather a skilled workforce and a quality of life attractive to employees. Workers, at least high-skilled workers in emerging fields, don’t follow jobs to the degree job candidates did in the past.

“Now jobs go where the people are,” Edmiston said.

Experts caution against “smokestack chasing”

Cuomo has expressed interest in luring major corporations to the region, but many experts warn against that approach.

For starters, it’s less cost effective than aiding companies already in the market. Generally speaking, more incentives are required to entice an out-of-town firm than to help one already in the region, Finkle said.

Moreover, there aren’t many “big fish” to lure, he said. There is the odd plant with 1,000 jobs, but Finkle said they almost invariably end up in “low wage, right-to-work states.” These days “a big deal is a 150 person employer.”

Jack Boyd, president of The Boyd Company, a site selection firm based in Princeton, N.J., agreed that big relocation projects are much tougher to come by.

“Five-hundred million is a big project for us (and) there aren’t a lot of projects like that,” Boyd said. “Twenty million is significant for a community.”

Edmiston, the Federal Reserve economist, said incoming projects generally don’t create as many net new jobs as expansion of existing plants because they tend to crowd out growth that would otherwise occur. He said studies have shown the net job growth involving a company coming into a market with 1,000 jobs is only 285 on average. On the other hand, an existing business that adds 1,000 jobs will trigger the creation of an additional 1,000 positions.

“Net employment impacts from firm expansions tend to be much greater than those associated with new-firm locations,” Edmiston wrote in The Role of Small and Large Businesses in Economic Development.

“This suggests that concentrating on organic growth, or the growth of existing or “home-grown” businesses, is likely to be a much more successful strategy than the recruitment of new firms. Given the role of small businesses in employment growth, supporting entrepreneurs and budding businesses is also likely to be an effective strategy,” he wrote.

Nevertheless, Boyd, the site selector, sees opportunities for recruiting, particularly from out of the country. He said now is an especially opportune time to recruit Canadian firms.

“It’s never been cheaper for Canadian firms to gain a brick and mortar foothold in the United States,” Boyd said.

Cuomo has indicated support for the notion of investing state subsidies in businesses that can establish a cluster industry or expand on one already established in the region. Experts said this makes sense.

“You will be more successful focused on what you already have going on,” said Thomas Kucharski, president of Buffalo Niagara Enterprise.

Making the case for entrepreneurs, small business

Cuomo’s approach as articulated thus far does not address some key structural deficiencies in the regional economy.

The region lacks for small business, which is considered the driver of most job creation.

LeRoy, of Good Jobs First, said small business “pack a better buck for the local economy.”

They are more likely to procure good and services locally, less likely to relocate and retain profits within the community, he said.

Consider that Buffalo-Niagara ranked 68^th among the nation’s 100 largest metro areas for small businesses (under 100 employees) per 1,000 residents in a 2010 survey done by American City Business Journals. That same survey ranked Buffalo-Niagara 80^th for small business vitality.

Older studies ranked the region last in both net firm creation per 100,000 inhabitants and number of initial public stock offerings among major metro areas.

The study, called “Securing the Future,” prepared for the Institute for Local Governance and Regional, lamented “the conservative and risk-averse culture that currently exists within the region.”

The problem continues, and it extends beyond the business culture. Start up and expansions are being hampered throughout upstate, including Western New York, by an absence of venture capital.

“Upstate NY is a venture capital desert,” proclaimed Excell Partners of Rochester in a landmark study in 2009.

The lack of VC is undermining the commercialization of research and development produced at universities and research institutions throughout the state, including the University at Buffaloand Roswell Park. New York receives some $4 billion a year in federal research and developmentfunds, second in the country behind California.

Many government and business leaders have pinned Western New York’s economic future on capitalizing on UB, but the lack of private VC and what some see as the region’s poor climate for entrepreneurs stymies that effort. Cuomo, to date, has not mentioned VC as a potential use of some of the $1 billion. Lawmakers last year, however, established a statewide venture capital fund that begins to fill the gap.

Rich subsidies often fail to produce big job numbers

The Section 108 Loan program, financed by the federal government and used by many cities to finance economic development projects, caps subsidies at $35,000 per job. One of the larger loan programs administered by the Small Business Administration, requires one job for every $65,000 to $100,000 borrowed, depending on the type of business activity.

Those kind of standards have often gone out the window when state and local economic development officials have put together subsidy deals to attract or retain companies in Western New York.

• Yahoo’s subsidy package works out to $2.1 million per job.
• Some $40 million in subsidies to renovate the former Dulski Building into Avant in downtown Buffalo worked out to more than $900,000 per job.
• Olin and Occidental, the biggest local industrial consumers of low-cost hydropower, were enjoying discounts worth well over $100,000 per job, per year, according to calculations made in 2007 by The Buffalo News.
• The package for GEICO committed $87,250 for each job the company pledged to create in its first five years.

How disciplined the state will be in structuring subsidy packages will determine how many jobs the $1 billion will buy. Yahoo-type deals will net hundreds of jobs. Deals in line with federal cost-per-job ceilings could generate 10,000 to 25,000 positions.

Any job growth would represent progress – Erie and Niagara counties have lost 17,900 jobs since 2000, including 10,900 since the Great Recession of 2008. But the more jobs, the greater the impact on the local economy. 20,000 jobs paying an average of $50,000 would generate $1 billion a year in payroll – enough to start to make a difference.

“If you’re trying to create jobs, you have to look at cost per job,” LeRoy said.

Dennis Penman, a developer and former chairman of the Erie County Industrial Development Agency, said the governor’s initiative is “a game changer” because of the sheer size of incentives.

“At the end of the day, one billion dollars is one billion dollars,” he said.

“That’s a big infusion, for sure,” said Edmiston, the Federal Reserve economist. “But a lot depends on how it’s used.