Author Archives: James A. Bacon

Supporting Community Development One Business at a Time

Neil Smith shows off a mini-pie.

by James A. Bacon

New Zealand-born Neil Smith was on tour with Nine Inch Nails seven years ago, serving as personal chef for the industrial rock band, when he found himself in Richmond. There he met Nikki, a local woman hired to help out for the day. One thing led to another and before long they got married. After 10 years on the road, he figured that Richmond was good a place to settle down. The city reminds him a bit of home, he says, and he’s made a lot of friends here.

And, it so happens, when he needed help launching a new business venture, the Proper Pie Co., he found ample community support. His start-up was one of four to receive funding last year from the Supporting East End Entrepreneurship Development (SEED) program bankrolled by the Bon Secours Richmond Health System.

Kiwis love pies — meat pies, vegetable pies, dessert pies. They devour them like people wolf down burgers and pizzas here in the States, says Smith, a stocky man with a buzz cut and tattoo-stitched arms who could pass for a rugby player. He started thinking about the idea several years ago. When he noticed that a couple of pie restaurants had popped up in New York, L.A. and other U.S. culture hubs, he figured the idea might fly in Richmond, too. The community funding helps underwrite his plan to open a pie shop in a targeted retail-residential corridor in the Church Hill neighborhood.

In the launch phase, says Smith, he will start small, concentrating on perfecting the product and drawing customers to his restaurant, which will serve meals with pie entrees. If all goes well, he’d like to add some outlets around town.

Proper Pie Co., which hopes to open in August, served as the setting for a press conference Monday held by Bon Secours to highlight the winners of its 2011 grant competition and to announce the grant of a second $50,000 to stimulate the development of businesses in Richmond’s 23223 zip code. Bon Secours, which operates Richmond Community Hospital, launched the program as part of its outreach to Richmond’s east side. The Catholic health care system partnered with the Virginia Local Initiatives Support Corporation to identify potential recipients.

Other entrepreneurs to receive funding included Evraim Dogu, who is opening a bakery that will make bread from indigenous and locally grown grains; Jodi Burton, who is starting a hauling and disposal business; and Karen Wilson,who is using the funds to develop classes for her natural beauty company.

Smith’s meat pies are delicious. I wouldn’t be surprised if they Kiwi pies sweep the nation as the next big culinary fad. On the other hand, the flame-out rate for small business is scarily high. Whether or not Smith and his co-recipients survive the ruthless winnowing of the market price, I’m willing to bet that community-based micro-grants like these will create a lot more jobs per dollar than when the federal government indiscriminately air drops dollar bills around the country. Moreover, the grants will help bring vitality back to an urban area that had been significantly depopulated by the white flight of the 1960s and 1970s — an area well served by existing infrastructure that won’t pose an added burden to the region’s transportation system or to taxpayers. The program doesn’t just create jobs, it creates jobs in the right location. Kudos to Bon Secours and the City of Richmond.

Virginia’s New Manufacturing Challenge — Peoria, not Peking

by James A. Bacon

At long last there is evidence to suggest that manufacturing in the United States has turned the corner. After a decade and a half of steady of corporations moving their manufacturing platforms overseas, U.S. manufacturing employment has enjoyed a modest rebound the past two years. Chinese labor costs are rising, corporations are less enamored with complex, global supply chains, and domestic energy costs (particularly for natural gas) are falling.

In the 1980s and 1990s, Southern states would have been beautifully positioned to grab the lion’s share of gains from a manufacturing renaissance. Low taxes, low wages and right-to-work laws made the south the most competitive region in the country for manufacturing investment. But in the 2000s, the Midwest pulled slightly ahead of the South in manufacturing performance, says the Brookings Institution in a new report, “Locating American Manufacturing: Trends in the Geography of Production.

Since 2000, the long-term shift of manufacturing jobs away from the Northeast and Midwest was partially reversed, suggesting that recruitment of manufacturers on the basis of low labor costs and locational subsidies may no longer be an effective regional policy for attracting manufacturing jobs, if it ever was. In the first decade of the century, when all regions of the country lost manufacturing jobs, but the Midwest and South both lost those jobs at about the national rate of 34 percent.

During the last two years the Midwest was the nation’s largest gainer of manufacturing jobs. Between the first quarter of 2010 and the last quarter of 2011, the Midwest gained those jobs much more rapidly than the nation as a whole (with an increase of 5.2 percent, compared with a gain of about 2.7 percent nationwide). Nearly half of all manufacturing jobs gained during this period were gained in the Midwest. At the same time, the South saw manufacturing job growth of 2.2 percent.

I’m not entirely convinced that there has been a shift in competitive advantage. I would conjecture that the surge in Midwestern manufacturing jobs in the past couple of years can be traced to (a) the rebound in the automobile industry and (b) the rebound in the steel and metal fabrication business for oil and gas pipeline and drilling equipment. The shift can be explained, in other words, by the fluctuating fortunes of key industries, not a generalized gain in competitive advantage. But let’s not quibble with the Brookings scholars. Let’s hear them out.

Brookings argues that manufacturing is becoming part of the “innovation economy,” in which the critical variable is not the cost of land, labor and utilities, but the ability to innovate. And manufacturing innovation, they say, is most likely to arise in dense industry clusters where there is a pooling and interaction of people with specialized knowledge. And those clusters are still strongest in the Midwest.

The nature and duration of any new manufacturing moment are going to be highly shaped by the local dynamics of regional supply chains and industry clusters. … Dense economic activity has many benefits for society. Firms that locate near other firms (whether these firms are in the same industry or diverse industries) are more innovative. Because firms lose access to these advantages if they move away, they are less likely to move to lower-wage locations.

Virginians should bear this dynamic in mind as they ponder state economic development policy, especially when committing to massive infrastructure projects like the U.S. 460 Connector. Sure, we’ve got the land, the labor and the transportation assets. But we cannot take it for granted that those factors will drive manufacturing investment like they once did. Economic development strategies that worked for Virginia 20 years ago may not work today.

See Brookings’ metropolitan profiles:

Hampton Roads
Richmond
Washington

MWAA’s Murky Constitutional Status

How many angels can dance on the head of a pin?

by James A. Bacon

Is it possible to create an interstate compact when one of the “states” is the District of Columbia, which, in fact, is not a state? To be more specific, is the agreement between the Commonwealth of Virginia and the District of Columbia that creates the Metropolitan Washington Airports Authority a true “interstate” compact, and should it be governed by the same rules as compacts between two actual states?

Dan Scandling, chief of staff for Rep. Frank Wolf, R-10, concedes that the issue is arcane. But the questions have come to the fore in the power struggle over the composition of the Metropolitan Washington Airports Authority (MWAA) board of directors.

Last year Congress passed a law, signed by President Obama, that would expand the MWAA board from 13 members to 17, including two appointees from Virginia. The law also required board members whose terms had expired to step down. (Two board members are currently serving even though their appointments have expired, and that number could increase to three by the end of this month.) The law also empowers appointing executives like Governor Bob McDonnell to remove board members with cause. If enacted, the provisions could lead to a major shake-up of the board.

MWAA has argued that it could not comply until both Virginia and D.C. amended their interstate compact. The United States Constitution gives power to Congress to review and approve compacts between two more states, MWAA contends. But the Constitution is silent on Congress’ authority to amend an interstate compact. The issue has never been addressed by a court, so the MWAA board contends, in effect, that it is exempt from the dictates of Congress.

Scandling disagrees. “It is the law. Period.”

When asked to elaborate, he added, “This. Is. The. Law. The authority knows it.”

The District is a federal entity, he continues, so the agreement between Virginia and D.C. is not an “interstate compact.” Dulles airport sits on federal land. The airport was created by the federal government. There are three federal appointees on the MWAA board. Therefore, MWAA is subject to the power of the federal government.

MWAA was opposed to the governance legislation as it worked its way through Congress. And the very same day Obama signed it into law, Scandling says, MWAA hired an outside law firm to advise the board on how it could avoid complying with the bipartisan law. That firm, Jenner & Block, duly obliged.

Furthermore, Scandling pokes a hole in Jenner & Block’s case. In its 24-page memo, the law firm stated:

In the entire history of interstate compacts, we are unaware of a single instance in which Congress purported to amend or rescind a compact that it had approved. Had Congress intended such path-breaking legislation, it likely would have provided some sign in the legislation or its accompanying materials indicating as such. … No such sign is present. Instead, the Legislation consists of a series of small changes in 49106 that were adopted as part of larger appropriations legislation and that contain no explanatory language indicating an intent to change the terms of the Authority substantially.

But the law firm got it wrong, Scandling maintains. A document accompanying the legislation, referred to as a “report,” does, in fact, provide explanatory language that summarizes the major changes of the law.

However, in possible contradiction of Scandling’s position, the report’s language also includes the following: “The conferees expect the jurisdictions to expeditiously implement these modifications.” That wording that could be interpreted as meaning that some other action from the jurisdictions/states was required to implement the law.

So, who’s right? I’m no lawyer. I checked with the state Attorney General’s office. Here is the response I got from the communications office: “We don’t have anything we can share right now, but I will get back to you as soon as we do.”

Murk alert: It gets even more complicated. A friend offers another twist on this issue. Under the U.S. Constitution, Congress exercises exclusive jurisdiction over the District in “all cases whatsoever.” Although it delegated much of its authority in 1973 to elected city officials under home rule, Congress can revoke that authority at any time. Thus, even if the District refuses to amend the interstate compact, Congress can overrule the mayor and city council.

Voter ID: Get Over It, and Get Out the Vote

by James A. Bacon

I didn’t see any pressing need for the Voter ID law in Virginia but now that we’re going to get one, I don’t see the need to get all agitated about it. In signing the Voter ID legislation into law, Governor Bob McDonnell issued an executive order instructing the State Board of Elections to issue voter cards to every Virginia voter by election day and to launch a public education campaign to raise awareness for the need to bring an ID card to the polling place. (See the press release.)

The idea that African-Americans and Hispanics will be disenfranchised by the thousands is a paranoid conspiracy fantasy peddled to whip up the fears of minorities. Really and truly, it’ s nothing but race mongering.

Why am I so confident that the impact on voting will be minimal?

First, because of McDonnell’s aforesaid prophylactic measures: issuing cards to voters and launching a public education campaign. And second, because Democrats, like Republicans, spend massive sums in get-out-the-vote efforts. How much effort will it take for Dem organizers to make sure every potential Democratic voter has a proper ID card?

Someone was certainly effective in persuading convicted felons to vote in 2008. (See “What Do You Know, There Is Electoral Fraud in Virginia?”) If minorities fail to turn out in the hoped-for numbers, blame the Democratic Party for running an inadequate get-out-the-vote effort.

And if a handful of people slip between the cracks, well, it won’t threaten the democratic system. The Bacon family knows what it’s like to be deprived of the right to vote. (See “Voter Suppression through Bureaucratic Lethargy.”) I dare say that the problem of registering people moving in and out of the state will be a far bigger problem than “voter suppression” by a dozen times over.

Former Guvs Urge MWAA to Backtrack on PLA Policy

Three former Virginia governors and a former U.S. Senator have urged the Metropolitan Washington Airports Authority (MWAA) to “put ideology, partisan politics, pride and parochial interests aside” and reverse its decision to favor Project Labor Agreements (PLA) when evaluating construction bids for Phase 2 of the Rail-to-Dulles project.

“The Project Labor Agreement (PLA), the key point of contention, is a political and philosophical issue upon which reasonable people can disagree. To resolve that issue, we recommend that the MWAA board adopt the same prescription for Phase 2 as it prescribed for Phase 1 and leave it to the selected prime contractor to choose the best method to meet MWAA’s requirements for Phase 2,” stated the letter signed by Republicans John W. Warner and Linwood Holton and Democrats Chuck Robb and Gerald L. Baliles.

Current MWAA board policy is to favor a PLA, but not require one, by giving additional points in the bid evaluation to prime contractors whose proposals include a PLA. Under a PLA, the contractor hires labor through a union shop. The governors are urging the board to revert to the policy that prevailed during Phase 1 construction in which the winning bidder, Dulles Transit Partners, voluntarily signed a PLA but sub-contractors were not required to.

Critics of the MWAA’s pro-PLA policy say that it might discourage open shop contractors from bidding on the estimated $2.7 billion project, thus increasing the likelihood of a higher bid.

The copy of the May 14 letter that was passed along to me was addressed to Todd A. Stottlemyer, a Virginia representative to the MWAA board recently appointed by Governor Bob McDonnell. I do not know if the letter was distributed to other board members.

“As Republicans and Democrats, we come together again to ask that you and your fellow decision makers on Dulles Rail continue to work with [U.S. Transportation] Secretary [Ray] LaHood — and with each other — to resolve your differences and move this vital project smartly forward in a cost effective manner, and without putting an unfair burden upon the Dulles Toll Road users.”

My only question… Why were the signatures of other former governors — Sen. Mark Warner, Tim Kaine, George Allen, Jim Gilmore and Doug Wilder — not affixed to the letter?

– JAB

Yes, the Cville Bypass Is under Budget

Photo credit: The Hook

by James A. Bacon

Last week the Virginia Department of Transportation (VDOT) opened bids for the design and construction of the Charlottesville Bypass, claiming that the low bid of Virginia Beach-based Skanska-Branch/JMT came in beneath the department’s official projection and within the $197 million allocated to the project. However, project foes stated that, based upon the evidence available to them, the low bid appeared to be over the limit. (See previous post.)

Additional information provided by VDOT officials strengthens the case that the Skanska bid did come in below the official estimate. Assuming Skanska meets VDOT’s criteria as a qualified contractor — it has sufficient bonding capacity, it meets disadvantaged enterprise goals, etc. — there appears to be no substantial barrier for the controversial project to proceed.

The total cost of the project, including money spent on engineering and right-of-way, was estimated to be $244.5 million. Of that amount, VDOT had set aside $125.6 million for additional engineering and construction. Skanska’s bid was $136 million, or seemingly $10 million higher. How could VDOT say that the project came under bid?

Because the new project design slashed Right of Way costs, says Jim Utterback, Culpeper district administrator. Instead of spending $71 million to acquire additional ROW, the state will have to spend only $35.4 million — a difference of almost $36 million. The original design called for elaborate flyovers crossing U.S. 29 at the northern terminus. The revised design eliminates the flyovers, sparing the necessity of acquiring land east of the highway. The revised design also reaped smaller savings in land acquisition at the southern terminus, he said.

Does that mean the final cost will come in $25 million under estimate? Probably not, says Utterback. VDOT has to set aside a contigency fund, and it will have to absorb Construction and Engineering Inspection costs. He anticipates that the available funds will cover those administrative costs.

Despite questions regarding expenditures such as landscaping and noise abatement, Jeff Werner, Albemarle and Charlottesville land use officer for the Piedmont Environmental Council, conceded that the project appears to come in under budget. He is baffled by how it’s possible for Skanska to slash out so many of the costs identified by VDOT staff but not incorporated into the original cost estimate, and he would like to dig into the accounting. But as long as Skanska does what it says it will, he said, he has no grounds to object to the bid.

The big question now is this: What trade-offs did Skanska make in its proposed design and how will they effect the bypass performance? In the original design, the Bypass would shave 2 1/2 to 3 minutes in driving time. But the substitution of a stop light or tighter curves for flyovers, and a steeper slope over Stillhouse Mountain to reduce excavation costs, could diminish the time savings and degrade the project’s economic Return on Investment.

Opponents also say that by the time the Skanska design is made public, there will be no public hearings or any other opportunities for the public to critique the alterations from previous incarnations of the design.

Will Washington Mayor Gray Side with McDonnell on MWAA?

by James A. Bacon

Overlooked in the contentious debate over Virginia’s representation on the Metropolitan Washington Airports Authority board is this salient fact: MWAA won’t seat the two new directors appointed by Governor Bob McDonnell until the District of Columbia joins Virginia in amending the interstate compact creating MWAA. While Virginia passed the necessary legislation, which goes into effect July 1, D.C. has not.

Indeed, there is no assurance that the District will play ball. According to my sources, Mayor Vincent C. Gray’s office agrees with MWAA that no new representatives can be added to the authority’s board until D.C. also amends the compact. And right now, the mayor’s office is reviewing its options. Nothing has been decided. No measures have been introduced to City Council.

Governor Bob McDonnell and the MWAA board have been battling over a number of issues relating to the cost and financing of the Rail-to-Dulles heavy rail project. Last year Congress passed a law, which was signed by President Obama, that would expand the MWAA board from 13 members to 17, adding one representative from Maryland, one from the District and two from Virginia. McDonnell promptly appointed two members but MWAA refused to seat them.

The United States Constitution gives power to Congress to review and approve compacts between two more states, explains Philip Sunderland, MWAA legal counsel. That makes sense, he says, because “you don’t want the states getting together and giving themselves power to perform federal activities.” But the Constitution is silent on Congress’ authority to amend an interstate compact. The issue has never been addressed by a court, so there is a legitimate question.

MWAA hired an outside law firm, Jenner & Block, to dig into the issue. In a 24-page review, the firm concluded that Congress does not have unilateral authority to impose its will on the states.

“We shared that opinion with a lot of people,” says Sunderland, including officials with the U.S. Department of Transportation, the Department of Justice and even the Virginia Attorney General’s office. “We are told that there are no lawyers with DOT or Justice who disagreed with the conclusions. … We never got anything back from Virginia.”

In a letter to the USDOT inspector general, which released a report critical of the MWAA board’s ethics and transparency, Rep. Frank Wolf, R-10,  declared that MWAA had retained the law firm specifically for the purpose of “advising the board on how it could avoid complying with a bipartisan law passed by Congress and signed by President Obama.”

Sunderlin rejects that characterization, insisting that MWAA hired the firm “to get direction on how to comply with the law.”

“We’re out to obey the law, not create the law,” he said. “We were not looking for a preordained conclusion.”

In theory, it would be marginally to D.C.’s advantage to increase the size of the board. By adding one seat to its existing three, it would juice the percentage of representation from 23.1% to 23.5%. However, that incremental gain may be offset by D.C.’s stance on MWAA’s decision to give preferences to Project Labor Agreements in the bidding process for Phase 2 of the Rail-to-Dulles project, or other issues.

I have put in calls to Wolf’s office and the Attorney General’s office and will update this post if they respond. If they do not contest Sunderlin’s analysis of the legal issues, I may have to update my characterization of MWAA as a rogue agency. Wrong, perhaps. But not rogue.

Media General Sells Newspapers, Old Richmond Fades Away

Times-Dispatch office. Photo credit: William H. Harnett

by James A. Bacon

Richmond-based Media General announced the sale this morning of all of its newspapers, except those in the Tampa Group, to Berkshire Hathaway, Inc. for $142 million in cash and help in refinancing its capital structure. Newspapers affected include the Richmond Times-Dispatch as well as daily newspapers in Charlottesville, Lynchburg, Danville, Bristol and Manassas.

Heavily indebted since the purchase of major broadcast properties years ago, Media General was looking for ways to refinance bank debt that comes due in 2013. Berkshire Hathaway will provide Media General with a $400 million term loan and a $45 million revolving credit. The new loan, which will mature in May 2020, will be used to fully repay the company’s existing bank debt. Stated the press release:

The Media General newspapers will be part of BH Media Group, along with the Omaha World-Herald Company newspapers. A sister company of the Omaha World-Herald Company, World Media Enterprises, Inc., will manage the Media General newspapers.

“In towns and cities where there is a strong sense of community, there is no more important institution than the local paper,” said Warren Buffett, Chairman of Berkshire Hathaway. “The many locales served by the newspapers we are acquiring fall firmly in this mold and we are delighted they have found a permanent home with Berkshire Hathaway.”

The sale is deeply symbolic, marking the passing of the old Richmond elite. The Richmond Dispatch was founded in 1850 and the Daily Times in 1886. By 1900 Joseph Bryan had brought the two newspapers into common ownership. Richmond Newspapers Inc. entered an aggressive growth phase under D. Tennant Bryan, who acquired newspapers in Tampa, Fla., Winston-Salem, N.C., and other cities, as well as newsprint, broadcast and cable television properties.

Under the leadership of D. Tennant’s son, J. Stewart Bryan III, the company reached its apogee, shedding its newsprint operations and selling its cable television operations in Fairfax County and Fredericksburg for $1.4 billion, then forged a strategy around the anticipated digital “convergence” of broadcast, print and Internet media. Despite fears that the Internet would erode advertising margins for traditional media, Media General doubled down with major acquisitions during the 2000s as well as some ill-advised acquisitions in the Internet space. However, the increase in Internet revenues didn’t come close to offsetting the loss of traditional advertising revenue. Burdened with massive debt, profitability declined markedly.

The bow-tied Stewart Bryan was a fixture of the old Richmond establishment. He was an old-school gentleman and he knew newspapers and broadcast but I got the sense that neither he nor his successor as CEO, Marshall Morton, ever understood the Internet. The first executive they put in charge of the company’s Interactive Media Division (IMD) was a blowhard who held endless meetings that accomplished nothing, and was single-handedly responsible for my decision to leave the company. As publisher of Virginia Business, I saw no great future for traditional print media, and it was my goal to migrate the Virginia Business brand to the Internet as rapidly as I could. But I could do nothing except through the IMD and found myself thwarted at every turn and unable to deliver on promises made to customers. Media General had treated me well otherwise — overlooking my occasional outbursts of speaking truth to corporate power — but I departed in frustration in 2002.

As symbolized by the sale of the Times-Dispatch, few of Richmond’s “old money” companies survive. The old Virginia dynasties aren’t especially wealthy anymore — the Bryans have seen their ownership stake in Media General evaporate to almost nothing — and they certainly aren’t as visible in positions of civic and business leadership. But it’s not clear at all who will succeed Bryan and his peers. The good news is that the field seems to be wide open. Richmond is reinventing itself and I remain optimistic about the region’s long-term future. What Berkshire Hathaway ownership means for the Times-Dispatch and other newspapers, however, remains to be seen.

Quote of the Day: Jim DeMint

From a viewpoint written by Sen. Jim DeMint, R-SC, and published by the Republican Joint Economic Committee:

“Just as Greece enjoyed years of low interest rate loans to finance their debt due to the backing of the Euro’s good name, the United States is today enjoying a time of artificially low interest rates as a result of loose monetary policies from the Federal Reserve and global markets’ assessment of the United States as a relative safe haven. The era of cheap borrowing for the United States will eventually end, and the longer Congress waits to enact serious fiscal reforms, the more painful that day will be.”

When U.S. interest rates start rising, that’s when the deck of cards starts collapsing. It doesn’t matter who’s running the country. The only question remaining is how long we can stave off the inevitable. Boomergeddon cometh.

– JAB

Hoist a Mug to Win-Win-Win Economic Development

Photo credit: Virginia Business

It may be a small step forward — perhaps I should say, a “micro” step forward — but Governor Bob McDonnell’s signing yesterday of two laws to stimulate small beer breweries in Virginia is exactly the kind of economic development initiative the state needs.

One law will permit manufacturers to lease space in their brew houses to micro brewers, while the other will allow retail sales of beer and sampling on the premises of Virginia breweries.

Said McDonnell in a press release: “This legislation positions Virginia’s craft brewers to grow and create more jobs in the Commonwealth. From Arlington to Abingdon, entrepreneurial Virginians are innovating and brewing critically acclaimed beers. The legislation signed today will make it easier for our breweries to serve as destinations for potential customers and allow some of our talented small-scale brewers to lease space from established brewers and overcome some of the significant start-up costs.”

Added Eric McKay, co-founder of Hardywood Park Brewery: “Fueled by a passion for quality, innovation and unique flavors, a focus on local ingredients, a commitment to community philanthropy and a dedication to environmental sustainability, Virginia’s craft brewers are significantly empowered through Governor McDonnell’s unprecedented support. … We commend Governor McDonnell for identifying this opportunity for economic growth through greater liberties to productive and responsible manufacturers.”

By themselves, these measures will hardly set the Virginia economy afire. There are only 44 licensed breweries in the state, and even if the number doubles, the resulting job creation would barely dent unemployment numbers. However, I can’t see a downside. Consider:

  • The legislation requires no expenditure of state funds.
  • The measures expand consumer choice available to Virginians.
  • The two bills expand the sphere of personal and economic liberty rather than restrict it.

Frankly, it’s hard to imagine why legislation was needed in the first place. But state law pertaining to the distribution of alcohol is riddled with crazy provisions serving one special interest or another. Kudos to McDonnell and the legislators who submitted the bills: Sen. Jeffrey L. McWaters, R-Virginia Beach, and Jennifer L. McClellan, D-Richmond.

Now, let’s see what other idiocies need correcting!

– JAB