Category Archives: Economic development

Is McAuliffe Crying Wolf on the Economy?

naval shipyard By Peter Galuszka

Just how bad is the Virginia economy, really?

Gov. Terry McAuliffe, who released a rather modest state budget proposal just a few days ago, has said that the state’s economic picture is bleak because of government spending cuts, most of them at the U.S. Department of Defense, the state’s largest employer, and at other agencies.

“We’re looking down the barrel of a gun,” he told reporters, noting that automatic cuts in federal spending due to sequestration and the run-down of military spending after more than a decade of fighting in Iraq and Afghanistan are badly hurting the state.

There are two curious points. The Washington Post notes that McAuliffe had based some of his gloomy thinking after revenues dipped by $439 million earlier this year. This relates to the $2.4 billion shortfall in the biannual budget. Now, says Finance Secertary Ric Brown, revenues have picked up as the governor and lawmakers have worked to close the shortfall.

There is also a story in this morning’s The Virginian-Pilot that the Norfolk Naval Shipyard (located in Portsmouth, actually) plans to hire some 1,500 workers by this coming September. This will be a net gain of 800 workers making about $21 an hour. The other 700 workers will be to replace retiring ones.

The shipyard, which can handle work on large nuclear ships like aircraft carriers, has a total workforce of 9,500 and the extra hires will take it past 10,000, the highest number since the early 1990s. Most of the new jobs are in skilled trades such as welding and ship fitting.

The Pilot reports that Hampton Roads will lose a total of 18,000 skilled workers by the end of the decade as older employees retire. Replacing them should help mitigate the cuts in federal spending and McAuliffe is doing the right thing by focusing on jobs training and credentialing that will boost high-paying blue collar jobs that don’t require a four-year college degree.

The state’s 23 community colleges are working to come up with a plan required by the federal Workforce Innovation and Opportunity Act, passed this year, to streamline training and make sure that trained workers pass certain requirements.

The Joint Legislative Audit and Review Commission recently issued a scathing report on just how disjointed job training is in the state. It said that there was no system to track how $341 million was spent in state workforce training programs and that only 16 percent of the companies in the state use it. The new federal law may help change that by requiring states to come up with four-year plans on coordinating training.

It could be that McAuliffe is crying wolf to shake up the General Assembly before it convenes Jan. 14. He’s doing just that by including funding Medicaid in his budget again and by calling for restrictions on gun sales (needed). But it may be important to keep in mind that things may not be all that bad, economically.

Keeping Them Fed

Sloppin' them hogs!

Sloppin’ them hogs!

By Peter Galuszka

Here’s a little touch of cartoon humor courtesy of our friends over at the Blue Virginia blog. An artist was apparently was inspired by one of my postings from a couple weeks ago.

Enjoy!

Our Throwaway Culture

00968005.JPGBy Peter Galuszka

As the holidays approach, what happens to the gifts after you give them?

Many end up in the trash.

I pondered those questions in the December issue of the Chesterfield and Henrico Monthlies. It deals with a polyglot of forces including the planned obsolescence of many goods, especially electronics, global trade cycles, and, most important of all, how Virginia communities deal with disposing of their gifts once they are no longer the latest “in” thing?

“The Throwaway Society” dates back maybe 70 or more years. It is not a new concept at all and it actually hit its prime in the 1940s when it was popularized by the very same industrial designer who gave us the Oscar Mayer Wienermobile.

Oscar-mayer-wienermobile600Today, the cycle often begins at a Chinese wharf and circumnavigates the world. Playing integral roles are lowly county dumps and the companies they hire to recycle what they can and dispose of hazardous materials found in virtually anything electronic.

It’s an off-beat story but it may be a fun read.

Not to spoil your Christmas or anything.

Learning from Buena Vista’s Golf Course Default

vista_linksby James A. Bacon

In 2005 the City of Buena Vista in the Shenandoah Valley issued $9.2 million in bonds to pay for construction of the Vista Links golf course.  To obtain financing, the city purchased insurance for $400,000 and pledged the golf course, police station and municipal building as collateral.

The city made its debt payments for several years but encountered difficulties in 2010 when the annual payment was scheduled to increase to $660,00 and the golf course was still operating in the red. The city went into default and entered into an agreement with its insurer, ACA Financial Guaranty Corp., to make half payments for five years. ACA remitted the other half but added it to the principal. The agreement calls for the city to return to the full $660,000 annual payment in 2016 and continue for 27 years.

On the logic that the city will be unable to make the full payment in 2016 if it continues make the half payments today, City Council voted earlier this week to default on its bond payment due in January 2015. Needless to say, ACA is unhappy with that decision. “The unilateral act by the current city council demonstrates an unwillingness to act in good faith to negotiate a solution,” said ACA in a press release. According to the Roanoke Times, ACA could foreclose on the golf course, police station and the portion of city hall that does not include the courts.

What possessed the City Council of Buena Vista, a city of less than 7,000, to go deep into hock to fund construction of a golf course? The Roanoke Times provides some background:

Vista Links was viewed as an economic development project that would move the city away from its industrial base and spur commercial and residential development while attracting visitors and their money.

“In the 1990s we were struggling to find an economic driver to enhance our aging housing base and diversify our economy,” [Mayor Frankie] Hogan said. “So we hired some consultants who showed city council projected numbers for a golf course that exceeded reality. Little did we know. But we should have.”

Bacon’s bottom line: Three lessons here. First, beware economic-development Hail Mary passes based on municipal debt. The city is far worse off now, saddled with debt and a ruined credit standing, than it would have been had it stuck to more prudent policies. Second, beware consultants. Maybe they know what they’re talking about, maybe they don’t. Third, beware fads. Other municipalities turned to golf courses as a development elixir. Many of those have fallen short of rosy projections. Indeed, the entire golf industry, public or private, is hurting.

The only people who should build golf courses are those who really understand the business and are prepared to handle the risk of failure — which excludes just about every municipality in the country. The lesson applies not just to golf courses but convention centers, baseball stadiums and other speculative “economic development” ventures. Local governments should stick to core competencies like education, public works and public safety at which they can excel.

Chopra Pushes “Open Innovation” in Hampton Roads

Aneesh Chopra

Aneesh Chopra

Aneesh Chopra took his message of “open innovation” on the road to Hampton Roads yesterday, pushing the case for making government data more readily available to the public for transformation into commercial products and services. Perhaps the single best example of wealth creation that can flow from government data, the Weather Channel, came from Hampton Roads, he noted. Norfolk-based Landmark Media Enterprises, which owns the Virginian-Pilot, launched the Weather Channel, which grew into a company of more than $500 million a year in revenue.

“Weather is a $5 billion-a-year industry,” said Chopra, “but the source data that fuels that industry comes from the Department of Commerce, the National Oceanic and Atmospheric Administration, which funds the satellites and the sensor networks that produces the raw data, which is open to anyone to consume, to build weather apps and other products and services.” (See story in the Pilot Online.)

A former Secretary of Technology for Virginia and former chief technology officer under President Obama, Chopra touted the “democratization of data” as one of several strategies for increasing entrepreneurial opportunity. Citing data showing the Hampton Roads had the lowest rate of new business start ups of any Virginia region in 2013, he also discussed ways of building the entrepreneurial talent pool by recruiting from the immigrant community, establishing regional early-stage capital and tapping the skills of tech-trainable veterans.

“No one’s going to come here – a white knight – saving the region while you sit back and observe passively,” said Chopra, a co-founder of Hunch Analytics, a Northern Virginia big data firm. “This requires active participation.”

– JAB

McAuliffe Goal: Take a Closer Look at Incentives

Governor Terry McAuliffe as salesman in chief

Governor Terry McAuliffe as salesman in chief

by James A. Bacon

Governor Terry McAuliffe’s great gift is salesmanship. He approaches the job of Virginia’s chief economic development officer with great enthusiasm, and he loves to wheel and deal. It’s not surprising, then, that his new strategic plan, “New Virginia Economy,” calls for an increase in the Governor’s Opportunity Fund to keep it “competitive with other states.” The fund is nearly depleted after the first year of the biennial budget, and the economic-development game won’t be much fun without more incentives to dangle.

The problems with incentives are well known. First, it is unknowable whether incentives actually induce a particular company to invest in Virginia, or whether the company simply takes the money because it is there for the taking. Second, there is an inherent unfairness in taxing existing citizens and businesses in order to shower benefits to newcomers.

What’s refreshing about the strategic plan is that it does recognize the need to scrutinize state incentive programs. In particular it proposes to prioritize the allocation of state dollars by conducting Return on Investment (ROI) analysis on different incentives and programs to see which yield the biggest bang for the buck. “New Virginia Economy” mentions three specific ideas:

Evaluate current policies and study the ROI on incentives and programs. The idea of setting up an “internal working group” to review performance is a good idea. All programs should be continually scrutinized by outsiders to see if they deliver value. I would argue that scarce public funds should be channeled to programs that yield the greatest ROI and poorly performing programs should be shut down.

The fact is, administrators of the programs themselves cannot rarely be trusted to give an honest evaluation. Bureaucrats have an instinct for self preservation. They want to maintain their programs — to grow them, if possible — and can be counted on to cherry pick evidence to justify continued funding. The best counter to this all-too-human tendency is to have outsiders  ask tough questions. Private companies have elaborate systems for allocating capital within their organizations with the goal of maximizing ROI. State government needs to create comparable processes for allocating public funds.

Enhance state research capacity for conducting ROI analysis. The strategic plan only hints at what the authors have in mind, but it seems self evident that it is impossible to conduct ROI analysis without data. In the realm of economic development, that means evaluating programs in light of the number of jobs created, how well those jobs pay, the level of capital investment, the impact on the state and local tax base and other basic data. A more sophisticated level of research would look for second-order effects. Would recruiting a new business to Virginia contribute to building a competitive and self-sustaining industry cluster? Would the company create contracting opportunities for other Virginia businesses? The list of questions is endless.

Reform the Tobacco Commission. The Tobacco Indemnification and Community Development Commission was founded with high hopes that it would revitalize the economies of Southside and Southwest Virginia, beset by the erosion of tobacco cultivation and the decimation of its mill-town manufacturing economy. The Commission has been criticized for a lack of oversight, which allows powerful politicians on the Commission to reward favored constituencies. The strategic plan calls for reforming the Commission to “maximize ROI on Commission investments” and to create a long-term sustainable funding model.

If we accept the premise that state government should dispense subsidies, tax breaks and other incentives to business — I personally don’t accept that premise, but the practice isn’t going to change any time soon — then we ought to ensure that the money is spent to the great public benefit.

Taking Another Whack at Virginia’s Dysfunctional Job Training System

workforceby James A. Bacon

Virginia spent $341 million in government funds in fiscal 2013 on workforce development programs. What did taxpayers get for their money?

There is no way to tell, according to a new Joint Legislative Audit and Review Commission (JLARC) report, “Virginia’s Workforce Development Programs.” Some of the main findings:

No consistent accounting. Virginia’s workforce development programs appear to spend a high percentage of funds on training rather than administrative overhead — a good thing — but there’s no way to tell for sure. Different programs have different definitions of what constitutes “programs” and what constitutes “administration.

No consistent performance metrics. Virginia programs do not fully measure participants’ success, employee satisfaction or employer satisfaction. Apprenticeship programs do not capture outcomes, such as whether apprentices remain in the industry after program completion or whether they earn higher wages.

Employers don’t use state programs. According to a JLARC survey, only 16% of employers use workforce programs. Employers find them complex, disjointed and difficult to navigate. They are overwhelmed by the number of partners and programs. Instead, they rely upon internal recruitment and training to meet their workforce needs. In many cases, the programs aren’t training skills in demand by employers. In other cases, programs are under-utilized because they are poorly marketed to students and job seekers.

Marginal return on investment. Contract researchers have conducted ROI analysis for several programs and found marginally positive 5- to 10-year returns for Workforce Investment Act programs and a negative return for the Trade Adjustment Assistance program.

These findings should come as little surprise given the way the state’s 24 programs are structured and administered. Sixty one percent of the funding comes from federal sources, which means they have strings attached on how the money can be spent. Administration is scattered across nine state agencies, innumerable regional workforce centers, community colleges, high schools and the Virginia Employer commission.

The fragmentation and ineffectiveness of state workforce development programs has been well known for years, if not decades. In 2014 the General Assembly replaced the old, ineffective Virginia Workforce Council with a Board of Workforce Development to advise the governor and legislature on workforce development matters.  This board, which includes representatives from a wide range of stakeholders,  is expected to monitor and oversee state agencies’ development of a common state vision.

However, JLARC says that state agencies continue to operate in silos, committed foremost to their individual agency missions. Moreover, the Workforce Board lacks the legal authority and the dedicated staff to fulfill all of its responsibilities. “The majority of board members are executive-level staff from Virginia businesses who reported that they have limited time to carry out all of the board’s responsibilities, and several board members expressed only vague knowledge of their responsibilities as board members.”

Bacon’s bottom line: The Commonwealth of Virginia probably could save a lot of money with little harm to the workforce simply by shutting these programs down. The state can’t do that — many of the programs are outgrowths of federal initiatives, and someone local has to administer them. But JLARC has the right idea. Let’s at least develop metrics to measure how well they’re working so the state can conduct Return on Investment analysis to prioritize how the $130 million or so in state dollars are spent.

As for reforming giving more power and resources to the Workforce Board, I’m dubious. We’ll return to the same issue four years from now, a new JLARC team will look at the fragmented, ineffective workforce-development system and, seeing how centralized it is, will recommend we decentralize it. The problems are so fundamental, I suspect, they can’t be fixed by redrawing the organization chart.

Big Energy’s Conspiracy with Attorneys General

Former Va. Atty. Gen. Miller --toady for Big Energy

Former Va. Atty. Gen. Miller –toady for Big Energy

By Peter Galuszka

What seems to be strong opposition to a host of initiatives by President Barack Obama and the U.S. Environmental Protection Agency to curtail carbon and other forms of pollution is no mere coincidence.

According to a deeply reported story in Sunday’s New York Times, some state attorneys general, most of them Republicans, are part of what seems to be a covert conspiracy to oppose carbon containment rules in letters ghost-written by energy firms.

And, there’s a big Virginia connection in former Democratic Atty. Gen. Andrew P. Miller and George Mason University which have been bankrolled by conservative and Big Energy money for years.

The cabal has drawn its modus operandi from the American Legislative Exchange Council, funded by the ultra-right, oil-rich Koch Brothers of Kansas. In that case, ALEC prepares “templates” of nearly identical legislation that fits the laissez-faire market and anti-government and regulation principles held dear by the energy and other big industries. Many marquee-name corporations such as Pepsi, McDonald’s and Procter & Gamble have dropped their ALEC membership  after public outcries.

In the case of the attorneys general, big petroleum firms like Devon Energy Corporation of Oklahoma draft letters opposing proposals that might hurt their profits such as ones to regulate methane, which can be a dangerous and polluting result of hydraulic fracking for natural gas. The Times notes that Oklahoma Atty. Gen. E. Scott Pruitt then took Devon’s letter and, almost-word-for-word, submitted it in his “comments” opposing EPA’s proposed rules on regulating fracking and methane.

The secretive group involves a great deal of interplay involving the Republican Governor’s Association which, of course, helps channel big bucks campaign contribution to acceptable, pro-business attorneys general. In 2006 and 2010, Greg Abbott of Texas got more than $2.4 million from the group. Former Virginia Atty. Gen. Kenneth Cuccinelli got $174,5638 during his 2009 campaign.

One not-so-strange bedfellow is former Virginia Atty. Gen. Andrew P. Miller who was in office from 1970 to 1977 and is now 82 years-old. He’s been very business promoting energy firms. As the Times writes:

Andrew P. Miller, a former attorney general of Virginia, has in the years since he left office built a practice representing major energy companies before state attorneys general, including Southern Company and TransCanada, the entity behind the proposed Keystone XL pipeline. The New York Times collected emails Mr. Miller sent to attorneys general in several states.

“Mr. Miller approached Attorney General Scott Pruitt of Oklahoma in April 2012, with the goal of helping to encourage Mr. Pruitt, who then had been in office about 18 months, to take an even greater role in serving as a national leader of the effort to block Obama administration environmental regulations.

“Mr. Miller worked closely with Mr. Pruitt, and representatives from an industry-funded program at George Mason, to organize a summit meeting in Oklahoma City that would assemble energy industry lobbyists, lawyers and executives to have closed-door discussions with attorneys general. The companies that were invited, such as Devon Energy, were in most cases also major campaign donors to the Republican Attorneys General Association.

“Mr. Miller asked [West Virginia Attorney General Patrick Morrisey] to help push legislation opposing an Obama administration plan to regulate carbon emissions from existing coal-burning power plants. Legislation nearly identical to what Mr. Miller proposed was introduced in the West Virginia Legislature and then passed. Mr. Morrisey disputed any suggestion that he played a role.”

Not only that, but George Mason has an energy study center that is bankrolled by Big Energy and tends to produce policy studies of what the energy firms want. It also has the Mercatus Center, a right-wing think tank bankrolled by the Koch Brothers.

So, when you see what seems to be a tremendous outcry against badly needed regulations to curb carbon emissions and make sure that fracking is safe, it may not be an accident. And, it comes from attorneys general who should be protecting the interests of average residents in their states instead of being toadies for Big Energy.

Meet the New Plan, Same as the Old Plan

ed_planby James A. Bacon

Last week Governor Terry McAuliffe published his strategic plan for economic development, which will provide a road map for legislative and executive policy for the remainder of his term. My quick-and-dirty analysis is that there’s nothing much new here — it checks all the usual boxes — but there’s nothing offensive either. This strategic plan, like those of previous administrations, represents the conventional wisdom of the usual stakeholders.

While the plan does acknowledge the necessity of emancipating Virginia’s economy from his dependence upon the federal government, it ignores the state’s slipping rating in a variety of national business climate rankings. Indeed, the report engages in delusional thinking. “From the robust economy to competitive taxes and incentives, Virginia’s pro-business climate has few, if any, peers,” states a passage describing Virginia’s economic development assets. I think Virginia is a great state and wouldn’t live anywhere else but, really, I know nonsense when I see it. Few peers? C’mon.

Virginia does have many strengths, which served the state well in a previous economic era dominated by corporate recruitment. Our building costs are eight to 22 percent lower than the national average. We have the second lowest workers’ compensation costs in the country. The state has maintained a AAA bond rating since 1938. Virginia can boast of “the greatest number of scientists and engineers of any state.” But the state is struggling to shift to an entrepreneurial, knowledge-based economy.

At least the authors of the report understand that such a transition must be made. As they note, thirteen of the state’s top 20 employers are either public-sector enterprises (U.S. Department of Defense, Fairfax County Public Schools) or private contractors dependent upon federal spending (Huntington Ingalls Industries, owner of the Newport News shipbuilding complex). But the situation is even worse than that. Of the top private sector employers, three are retailers (Walmart, Food Lion and Lowe’s Home Centers) and two (Sentara Healthcare and HCA Virginia Health System) are medical enterprises, none of which provide goods or services tradable outside the state. Only one company — Capital One Bank — creates products and services that it trades outside Virginia. That’s a sad commentary indeed.

The report correctly contends that the focus of economic development should be on building private companies that aren’t dependent upon government spending. To foster that growth, it sees government playing supporting role by being best in class in five areas: infrastructure; strategic growth sectors; overall business climate; entrepreneurism and innovation; and talent. The report also is realistic enough to know that in the current economically constrained environment, the commonwealth of Virginia is in no position to launch any big spending initiatives. The proposals described in the report are appropriately modest and focused.

The biggest void in the report is the lack of any connection between economic development and community development. Arguably, the biggest single challenge in economic development is not just developing a skilled and educated workforce but recruiting and retaining a workforce. It’s the old Richard Florida creative-class thesis. Corporations locate where the skilled labor is. Workers with education and skills tend to pick where they live, based on lifestyle amenities and cultural attitudes, not on where they can find a job. If a company can’t recruit workers to live in [name of your town here], it will suffer a competitive disadvantage. If young, skilled employees decamp for other metropolitan regions, the labor pool shrinks… and employers suffer a competitive advantage.

Our understanding of what mobile but highly desirable creative-class employees are looking for in their lives is still fairly primitive. We have some vague ideas — educated young people like walkable urbanism, bicycle lanes, cool food, a live music scene, etc. etc. — but no one is factoring that knowledge into a clearly articulated strategy that encompasses zoning policies, transportation improvements and public works investments. Until we do, every governor’s economic-development strategic plan will fall short.

Suddenly, It’s Raining Gas Projects and Tax Breaks

Anti-Pipeline By Peter Galuszka

Suddenly it seems to be raining natural gas pipelines and snowing millions of dollars in tax breaks and incentives for rich electric utilities.

Dominion Resources, the powerful and politically well-connected Richmond-based utility, apparently is getting $30 million in public money from the Virginia Tobacco Indemnification and Revitalization Commission without apparently asking for it to help build a new natural gas-fired generating plant in Brunswick County. The information was broken by the Associated Press.

Largesse for Dominion stretches to the other side of the Potomac River as well. The Washington Post reported Sunday that Calvert County Md., where Dominion has approval to convert a liquefied natural gas facility to handle natural gas exports, is going to give the utility about $560 million in tax credits.

And, back in Virginia, controversial is growing over the $5 billion natural pipeline that Virginia and three other southern utilities are planning to take natural gas drilled by hydraulic fracking methods from West Virginia to Virginia and North Carolina.

The Atlantic Coast Pipeline has drawn criticism from environmentalists who fear that gas is not the cleaner panacea to coal that many think. Landowners complain that Dominion and its powerful Richmond law firm, McGuireWoods, are using strong arm methods to force their way on their land to survey possible routes.

mountain valley pipelineYet another pipeline – this one doesn’t involve Dominion – is drawing concern in southwestern Virginia. The $3.5 billion Mountain Valley Pipeline that would likewise begin in the fracked gaslands of northern West Virginia and head south west of Roanoke and then cut to the small town of Chatham.

The complaints are the same as the Atlantic Coast Pipeline – green concerns about leaking methane and the threat of bulldozing bucolic private land by companies using eminent domain.

The Mountain Valley project is being spearheaded by EQT Corp. of Pittsburgh and NextEra Energy of Florida.

So what gives? Utilities like Dominion are using more gas, namely at its new Brunswick County natural gas plant and at an older coal-fired station that’s been converted at Bremo Bluffs on the James River. But how much gas does it actually need?

In the case of Cove Point, Dominion notes that the plant has been importing LNG from places like Northern Africa and Scandinavia for decades although imports have come to a spot given the glut of cheap, domestic gas.

Dominion, which bought the facility about a decade ago, can get gas from an older pipeline that for years has linked the Chesapeake Bay area with gasfields in Pennsylvania where some of the fracking for new product is occurring. Dominion can also tap gas from the venerable Transco Pipeline that for decades has transported gas the traditional way – from the Gulf State processing stations to the northeast.

Dominion says it already has contracts to export gas – from where it comes domestically – to utilities in Japan and India. But when one looks at the spaghetti-like twirl of all of the proposed new pipelines, one wonders what the game really is.

The Atlantic Coast Pipeline has a leg that bounds over to Hampton Roads from near the North Carolina border. Dominion says that this one will help supply one of its pipeline partners with gas because it serves South Hampton Roads. Ok, fine, but it might also serve another new LNG export facility in that area that has perfect deep water conditions for such a facility.

And, as some environmentalists and property owners wonder, why couldn’t the energy companies tap rights of way near existing pipelines? Why can’t existing pipelines be expanded? Go back to the utilities and they say they don’t know exactly where the pipelines will go.

That is very curious. While they don’t know where mega-billion project projects are going to go, they seem to be getting tens, if not hundreds, of billions of dollars in public funds and tax breaks to help them proceed with the Brave New World of natural gas.