State: Memo to Spitzer: A Better Path to a Better Economy

With Upstate New York mired in one of the nation's most sluggish economies, business and political leaders are searching for a way out. There are many different paths to a globally competitive economy, but Rochester-area public officials have relied heavily on tax breaks and other incentives. And corporate business leaders are fighting grassroots pressure to require subsidized businesses to pay living wages.

Other nations with successful economies have taken a different path, investing in infrastructure and technology, providing excellent social benefits and worker rights, and insuring that workers earn a living wage and that there is relatively equitable distribution of income.

Last year, the Fiscal Policy Institute released a report titled "One New York." (If the title is familiar, you may have heard Governor Spitzer use the phrase in his State of the State address.) The report makes some hard-headed recommendations about how we can build a strong economic future for the state by making smart public investments that pay off in the long run.

1) Invest in education.

New York is already one of the nation's leaders in worker productivity. While taxes matter to companies, productivity matters a lot more. What makes a business work is not low wages but high return on investment. And the "One New York" report recommends enhancing our competitive edge in productivity by investing in our workforce.

New York State's current funding for worker investments is only a fraction of the sum spent on economic development. Yet businesses consistently point to labor as a crucial factor in making decisions about site relocation. We should be investing in adult literacy, vocational guidance, and training programs. Georgia is providing its residents with two years of free post-secondary education and training at public schools. New York can do better.

And although New York has some of the best schools in the nation, large achievement gaps exist between schools and districts. Money will not solve the entire problem, but the state's current school-funding formula leaves vast inequities between school systems. Governor Spitzer's current school-funding proposal goes a long way toward addressing those inequities. We need to give all our children what they need to succeed, regardless of the wealth of the community. Good schools are key to making appealing and livable communities for executives and employees. Good schools will train the workforce of tomorrow while attracting the businesses of today.

2)Invest in health care.

Over half a million New Yorkers do not currently have health-care coverage, and millions more have inadequate coverage or are stuck in their jobs, clinging to the coverage their employer provides. Imagine if New York became the first state to take health care off the plate for employers. General Motors spends between $3,000 and $5,000 per car on health care for its employees, and we've recently seen GM relocate some manufacturing facilities across the border --- not to Mexico, but to Canada, where the universal health-care system allows businesses to pay a lower and more predictable amount for good-quality health care.

Because we don't have a comprehensive health-care system, hospitals have to absorb the cost of uninsured people who end up in the emergency room. The current Health Care Reform Act raises revenue for uncompensated care by adding 8 percent to the health-insurance costs of businesses that are doing the right thing and providing health insurance. This penalizes employers who are providing coverage and creates a further disincentive to hiring more workers.

New York's Family Health Plus is a lifesaver, but it lifts the health-care burden for some businesses but not for others. Universal health-care coverage would level the playing field.

New Yorkers don't want a complicated patchwork of health-care plans. As Fred Hochberg, dean of the School of Management and Urban Policy at The New School in New York City, has said: "Reliable health benefits for all workers without a lot of red tape would do more for small business than any tax cut." It's time to get beyond the outdated notion that health care should be tied to employers.

3) Reform workers comp.

Worker compensation also needs to be fixed. New York has among the highest workers-comp costs and lowest payout rates in the nation. A major factor in the cost is that private insurance-company middlemen create huge inefficiencies in the system. Administrative costs and insurance-company profits account for 36 percent of all workers-comp costs. On the other hand, the state insurance fund, which serves as the provider of last resort, actually provides insurance for far less. (Yes, the state can sometimes act more efficiently than the private sector.) One New York recommends using the state insurance fund to drive down costs.

Workers comp could also become more efficient by instituting a regional rating system (most accidents are downstate) and by investing in safety training. We also need to level the playing field among employers and increase compliance. Too many employers misclassify their employees as independent contractors in order to evade payment. Contactors also keep workers off the books and backdate their date of employment after an accident, thereby avoiding paying into the system.

And as local Labor Council President Jim Bertolone points out, if the state wants to save money on long-term workers-compensation costs, we should be talking about providing other work opportunities for injured workers. What New York State shouldn't consider is the Rochester Business Alliance's proposal to create artificial timelines to end payments to injured workers.

4) Invest in infrastructure.

Although New York probably won't benefit from another Erie Canal-type transportation infrastructure improvement, if we don't repair and improve our infrastructure we will be passed over by businesses that need excellent roads, bridges, ports, sewers, water, schools, and utilities.

Like the World Economic Forum, Standard and Poor's has approved of this kind of approach to economic development. A report by Good Jobs First, a national policy-research center, cites this 1993 S&P advice: "states' basic investment strategies ought to concentrate on enhancements in education, a qualified labor pool, and the development of a quality of life that would encourage investment without giving away the public treasury."

"Credit is enhanced more by such long-term structural developments than by costly and risky bidding wars," said S&P.

5) Focus our economic-development strategy.

New York currently suffers from economic development Attention Deficit Disorder. We cut business-incentive deals as they come into our line of vision and avoid any effort to develop and stick to a sensible, focused, economic-development strategy. One New York recommends identifying our economic resources and developing a long-term strategy based on our competitive position. Once the state has identified a unified "development budget," we can start to allocate funding based on our priorities. New York needs to invest wisely in our economic future.

Presumably, those priorities will not include wasting money on economic-development programs that are riddled with abuse. The Empire Zone and Industrial Development Agency systems need to be overhauled. Subsidy dollars should be given back when jobs are not created, and subsidies should go only to businesses creating good jobs, including prevailing wages during the construction phase. We don't want to encourage the creation of Wal-Mart jobs, and we don't want to subsidize contractors bringing in workers from out of state.

And the process needs to be transparent. The relevant municipalities and school districts need to be at the table when the tax-break decisions are being made.

New York should also keep in mind that manufacturing still provides a fifth of Upstate's total wage income. New York's manufacturing-assistance program is a step in the right direction, but Michigan's Manufacturing Technology Center determines eligibility for assistance based on whether the business is performing with above-average productivity, paying three times the minimum wage, and providing excellent health-care coverage.

And although small businesses don't have the political clout that large businesses have, New Yorkers should keep in mind that 88 percent of all businesses in the state are micro-enterprises and employ approximately 20 percent of the workforce.  The current state-funded micro-enterprise program generates $2 in tax revenue for every dollar the state invests. And it costs the state only $1,585 per job created, compared to $75,000 per job created under the Empire Zone program. Yet micro-enterprise subsidies make up a fraction of 1 percent of New York State's economic-development dollars.

6) Invest in technology wisely.

Obviously New York needs to invest in technological innovation, but we need to do it in a way that creates spin-off firms and isn't driven by politics. The state just cut a deal with AMD to locate a microchip fabrication plant in State Senator Joe Bruno's district with a subsidy that amounts to $1 million per job created.

7) Invest in cities.

Finally, we need to revive Upstate cities, concentrating economic development in urban areas. Cities have great bones and can be vital hubs of growth for their regions.

Monroe County residents living under the pulsing 50,000 watts of WHAM radio have been inundated with a steady stream of city bashing. This kind of scapegoating makes it difficult to begin discussions about the connections between the economic health of Greece, Irondequoit, Chili, Henrietta, and Jay Street, but we need to realize that we are tied together as we go up this mountain, whether we like it or not.

Sprawl is a lose-lose proposition. When outer-ring suburbs drain the city and the inner-ring suburbs of population, the inner ring can drop like a brick. (The crime-plagued Los Angeles suburb, Compton, is an inner-ring suburb.) And inner-ring suburbs don't rebound like cities do. Sprawl leaves villages with boarded-up Main Streets, and rural areas lose farms due to property-tax pressures. And development can be a net drain on outer-ring suburbs as the cost of roads, water supplies, sewers, and schools outpace the tax revenue collected in the new developments.

But Upstate, a Brookings Institution report notes, has been developing land at 28 times the rate of our population growth. That means that as we plowed under our farms and woods and built sprawling developments, we thinned out our population over vast stretches.The current incentives and political culture encourage developers to break new ground and build in suburbs rather than in cities, which already have good transportation access and existing pipes. The true cost of building in the suburbs should be included in the cost of development.

Good Jobs First offers this quote from Lyle Wray, executive director of the Capitol Region Council of Governments, based in Hartford, Connecticut: "Subsidizing economic development in the suburbs is like paying teenagers to think about sex." We ought not to be doing that with our tax dollars.

Sprawl has drained Upstate cities of many of their middle-class inhabitants. This has meant an increase in poverty density, meaning a bigger need for services yet a loss of tax revenue. The state revenue sharing, begun in 1980, has been capped, leaving cities falling farther behind. New York needs to remove the revenue-sharing cap to provide some oxygen for our Upstate cities.

In order to revive those cities, we need to provide amenities that make city living attractive, like vibrant cultural institutions, pedestrian friendly streets, excellent public transit, and libraries. This would help make Upstate cities "stickier" for retaining students and attracting young professionals. And healthy cities, in turn, help anchor the economic health of the entire region.

The One New York report is pointing toward an economic development road that we should be taking. Our efforts in recent years have been only marginally effective. To continue to do the same thing again and again and expect different results is the definition of foolishness. We don't want to be left standing on our abandoned airstrips, next to our bamboo radio towers, waiting for the gods to deliver our cargo.