Testimony before the Assembly Standing Committee on Economic Development, Job Creation, Commerce and Industry and Assembly Committee on Small Business

May 27, 1999. The Upstate Economy: Testimony delivered by Trudi Renwick, Economist,
Fiscal Policy Institute, Utica, New York.

Thank you for the opportunity to testify on the economic development challenges facing Upstate New York. I would like to review the economic situation in the State and then talk about three issues that affect the Upstate Economy: STAR, the difficulty of the welfare-to-work transition for people with no paid work experience even in areas with tight labor markets, and the ability of the State to leverage its purchasing power to generate economic activity in Upstate New York.

While there was some improvement in the New York State economy in 1998, New York’s recovery is still weak compared to the other states and the growth that has occurred has been concentrated downstate. Even in Upstate areas with some job growth, the job growth has been in the service sector rather than in the historically higher paying manufacturing sector of the economy. As a result of the weak Upstate recovery and the loss of higher paying manufacturing jobs, New York’s poverty rate has been higher than the national poverty rate and has remained high while the national poverty rate has fallen. In addition, New York has earned the dubious distinction of having the most unequal distribution of income of any state in the nation with the fastest growth in the disparity between the rich and poor.

Over the past four years New York’s private sector jobs have averaged an anemic 2.2% growth rate. This compares to 5.1% growth in Texas, 3.9% growth in North Carolina and 3.8% growth in California over the same period. In fact, of the ten major urban industrial states, only Pennsylvania has experienced slower job growth than New York. Even as New York’s job growth rate has accelerated in the past year, of the five states which border New York — Vermont, Pennsylvania, New Jersey, Massachusetts and Connecticut — only Pennsylvania has experienced slower job growth than New York between 1997 and 1998.

Job growth in New York State as a whole has been concentrated in the Service Sector. Of the 145,300 increase in jobs between April 1998 and April 1999, 67% were in Services while another 14% were in Retail Trade. Unfortunately, New York State continues to lose manufacturing jobs. In April 1999 there were 9,700 fewer manufacturing jobs statewide than in April 1998.

The recovery appears even more anemic when we look at the Upstate Economy by itself. If the Upstate economy were compared to the other states it would rank 49 out of 51 in job growth. Of the 151,600 new nonagricultural jobs between April 1998 and April 1999, 116,400 were in the New York City or Long Island. While the rate of nonagricultural job growth for the state as a whole was 1.9% for the past twelve months, Utica-Rome’s job base grew by only 1.6%. Other labor market areas with disappointing job growth in the past twelve months include: Albany-Schenectady-Troy (.9%), Binghamton (1.3%), Buffalo-Niagara Falls (0.4%), Elmira (0.7%), Jamestown (1.0%), Rochester (0.8%) and Syracuse (1.8%). Only two Upstate metropolitan labor market areas had growth rates above the state average — Dutchess County and Newburgh – Pennsylvania. Among the non-metropolitan labor market areas, six counties lost jobs (Cortland, Fulton, Greene, St. Lawrence, Seneca and Wyoming) while only eight counties (Cattaraugus, Chenango, Essex, Franklin, Schuyler, Steuben, Tompkins and Ulster) experienced employment growth faster than the state as a whole.

Between April 1998 and April 1999 the statewide unemployment rate fell from 5.6% to 4.9%. Unfortunately, only 17 of the 52 upstate counties shared in the fall in unemployment rates. Unemployment was up in 28 counties — Montgomery, Schoharie, Broome, Tioga, Elmira, Washington, Genesee, Monroe, Ontario, Wayne, Allegany, Cattaraugus, Chenango, Clinton, Cortland, Delaware, Essex, Franklin, Fulton, Hamilton, Jefferson, Lewis, Otsego, St. Lawrence, Seneca, Sullivan, Wyoming, Yates — and remained unchanged from the previous year in another four counties — Schuyler, Tompkins, Oswego, and Dutchess.

Many Upstate counties would have even higher unemployment rates if it were not for the decline in their labor forces. For example, in 1994 the Utica-Rome labor force averaged 144,020 workers but by 1998 the labor force in Utica-Rome had shrunk to 143,472 workers. A part of the decline in unemployment from 5.6% in 1994 to 4.6% in 1998 is therefore attributable to this decline in the labor force, not an increase in jobs. According to a recent study by the Federal Reserve Bank of New York, in 1998 Upstate New York lost approximately 0.4% of its population and 0.5% of its labor force.

STAR PROGRAM

Unfortunately, the state’s tax policy initiatives have only served to make problems in the Upstate economy worse. As income inequality grows, the Pataki administration has cut personal income taxes (a progressive tax) while increasing the reliance of the state on regressive property and sales taxes.

Some claim that local taxes are the cause of Upstate stagnation. Yet Governor Pataki’s STAR program will pour billions of dollars of tax relief into downstate counties. If STAR’s $2.6 billion dollars had been distributed as school aid, Upstate counties would have received millions more in tax relief than the way this aid is distributed under STAR. For example, Oneida County would have received $12 million more in aid than under the STAR program.

Upstate cities, particularly the large cities of Buffalo, Rochester and Syracuse, but even smaller cities such as Utica and Rome are disadvantaged by the STAR program because STAR favors districts with a high percentage of owner-occupied dwellings. For example, the Buffalo City School district will receive only $20 million dollars in STAR tax relief as compared to $63 million it would receive if the STAR relief were distributed as school aid. The Rochester City School district loses $30 million while Syracuse City Schools lose $17 million. While the numbers are less dramatic for the smaller Mohawk Valley city school districts and rural counties, all of them would do better if the same dollar amount of tax relief were distributed using the school aid formula.

While the STAR program addresses an important need, it does so in an inefficient and ham-handed manner. By allocating property tax relief in a way that is unrelated to the amount of a household’s property tax bill relative to its income, it delivers much less relief to those who are truly overburdened by property taxes than would a substantial expansion of the state’s circuit breaker tax credit. The STAR plan is also flawed in that it provides relief only to homeowners ignoring the fact that tenants as well pay property taxes indirectly through their rental payments. Expanding the circuit breaker would also eliminate the potential for such unequal treatment since it provides relief to both renters and homeowners.

EMPIRE STATE JOBS BILL

The next issue I would like to address is the difficulty of the welfare-to-work transition for people with no paid work experience even in areas with tight labor markets. Research shows that closely-supervised community service jobs increase both the chances that such individuals have of obtaining unsubsidized employment and their earnings potential. The establishment of such community service jobs also protects existing low-wage workers against potential displacement. Finally, residents of the areas served benefit from the improvements and services that workers in these jobs provide.

The Empire State Jobs Program would establish about 4,000 temporary wage-paying jobs in the public and non-profit sectors and would provide the individuals placed in those positions with the supportive services, such as education and training, necessary for them to move into unsubsidized employment, while protecting existing workers from displacement and increasing the opportunities that current workers in entry-level jobs have for career advancement. The Empire State Jobs Program is a five-year demonstration project and has a requirement for an annual evaluation of the program’s operation. This demonstration approach is intended to provide a reasonable test of the effectiveness of this approach to facilitating the welfare-to-work transition.

Furthermore, despite the economic recovery, there are far more welfare recipients slated to enter the job market than low skill jobs available, particularly in high unemployment areas like the Bronx and Buffalo. One study found that there were eight new low-skill job seekers due to welfare reform for every new job created in New York state, compared to a 5:1 ratio in Connecticut and a 3:1 ratio in Pennsylvania. (1)

New York State has a long and successful tradition of creating transitional employment programs to meet pressing public needs. This tradition includes depression era programs such as the Temporary Emergency Relief Act, the Work Relief Employment Program of the 1970s and the Civilian Conservation Corps of the 1980s. Welfare reform has sparked a new interest in transitional job creation: new programs are already operating in Detroit, Philadelphia, Washington, Vermont, Baltimore and San Francisco. Recently, Governor Tom Ridge of Pennsylvania announced his intention to create 16,000 new jobs for welfare recipients.

LEVERAGING THE PURCHASING POWER OF THE STATE TO CREATE JOBS

The final issue I would like to address is the ability of the state to leverage its purchasing power to create jobs. Over the last 17 years, since the State first made its first five-year commitment to improving the physical plant of the New York metropolitan area’s mass transit system, we have seen an increasing amount of the manufacturing activity related to that capital improvement program located in Upstate New York. Because New York’s Metropolitan Transportation Authority (MTA) is responsible for a very large share of all locomotive, train car, and bus purchases nationwide, New York State has been able to encourage many manufacturers and suppliers to locate their activity in the state. It has done this without establishing price preferences or other policies which would encourage retaliation by other jurisdictions. By using a point system that gives recognition to the New York content of these vehicles, the various consortia that bid on the MTA’s business have all increased their presence in New York State. In the early 1980s bidders were working hard to get above 15% New York content. In the latest procurements, the various competitors have offered proposals with over 30% New York content.

There are several ways in which we can build upon this progress. First, New York could take job quality into consideration. Second, it needs to address the boom and bust situation faced by many of the plants that locate in the state. Firms will increase employment substantially to deliver on large contracts only to substantially reduce employment or close down completely when the project is done.

New York should also consider whether it would be able to apply its experiences in transit procurement to other fields. For example, could New York leverage the apparel needs of state and local governments to support the expansion and/or stabilization of this manufacturing industry in the state.

For additional information contact:

Fiscal Policy Institute
One Lear Jet Lane Latham, NY 12110 phone: 518-786-3156 fax: 518-786-3146 e-mail: fpi@albany.net

Notes

(1) Cochrane, S. et al. The Economic Impact of Welfare Reform. Regional Financial Review, May, 1997.

Taxpayers Deserve a Fair Shake From Businesses That Receive Government Subsidies

May 25, 1999. Legislators and coalition of statewide organizations urge New York to join national move toward greater accountability in the granting of corporate subsidies. Group press release:

“State and local taxpayers should get their money’s worth from the billions in government subsidies that are given to businesses each year in New York State,” declared the Fair Budget Campaign at a press conference this morning at the Legislative Office Building in Albany. The Fair Budget Campaign is a cooperative project of nine statewide organizations that represent religious, senior citizen, community, environmental and taxpayer perspectives.

The leaders of the campaign’s member organizations were joined at today’s press conference by legislators who are sponsoring a series of bills that would address the issue of corporate responsibility and job creation. According to Frank Mauro of the Fiscal Policy Institute, “It’s about time that New York joined the increasing number of states that are require subsidy-receiving businesses to deliver on their promises of job creation or get off the taxpayer-funded gravy train.”

The Corporate and Financial Accountability Act sponsored by Assembly Majority Leader Michael Bragman and Senator William Stachowski would do just that by requiring firms that do not deliver on their job creation promises to return their “overpayment” to the taxpayers.

Assembly Majority Leader Michael J. Bragman said, “It makes good economic sense to help companies create and retain jobs by providing targeted financial assistance, but such assistance must be well-conceived and closely monitored. The Corporate and Financial Accountability Act will ensure that every dollar the state spends on strengthening the economy will produce a significant return on investment, by requiring companies to document job creation efforts and to repay financial assistance if they fail to meet economic development goals or fail to maintain high safety standards and fair labor practices.” Senator William T. Stachowski said “It’s all very simple: New York’s taxpayers should get what they pay for. If a company accepts public dollars based on a promise to create jobs, either that promise should be kept or the money should be returned.”

“Corporations doing business in the state, particularly those that receive firm-specific subsidies, must do business in an economically, socially and environmentally responsible manner,” said Karen Scharff of Citizen Action of NY. Both the Bragman/Stachowski bill and a measure sponsored by Assemblyman Martin Luster would move the state in this direction. “This package of bills is long over due. We have seen too many examples of corporations taking the taxpayers’ money and giving nothing in return,” commented Assemblyman Luster.

Unfortunately, New York has not fully participated in the recent economic recovery and unemployment remains much higher here than in the rest of the nation. Legislation introduced by Assemblyman Felix Ortiz would change the rules governing the state’s lucrative Investment Tax Credit to increase the credit going to firms that create and retain jobs and to reduce the benefits going to firms that reduce jobs in the state. According to Assemblyman Ortiz, “If we’re going to justify tax breaks like the Investment Tax Credit on the basis of job creation, then it’s only logical that we relate the size of a firm’s break to its job creation record.”

At the same time that New York’s economy sputters along, state and local governments continue to spend billions in taxpayer dollars on grants, loans and tax breaks for corporations.

Many of the same companies that get taxpayer assistance turn around and move jobs out of state, while giving huge raises to their CEOs and other top managers. Assemblyman Bill Magee’s innovative legislation would establish residency requirements for firms receiving government assistance. “Millions of dollars in aid is being lost to companies who show no commitment to the state of our communities,” said Assemblyman Magee. “Businesses that pocket state-aid and disappear do not deserve hard-working taxpayers’ dollars.”

Legislation sponsored by Assemblyman James Brennan would require that corporations disclose the amount of state taxes that they pay. Only in this way will taxpayers be able to tell if corporate loopholes are allowing large profitable corporations to pay little or nothing in state income taxes. “For decades, major corporations have been required to disclose how much they pay in federal income taxes, but the income taxes they pay to each state have been shrouded in secrecy. This legislation will allow a few rays of sunshine onto the amount big New York corporations pay to our state and allow greater public debate about the fairness and equity of our tax law,” said Assemblyman Brennan.

“Taxpayers of New York should not be subsidizing irresponsible corporations, ” said Mark Dunlea of the Hunger Action Network of New York State. “Grants, loans and state contracts should only go to corporations that pay their employees decent wages and benefits and refrain from paying indecent amounts to top executives, provide jobs for New York residents, obey the law, and pay their fair share of state and local taxes.”

The Fair Budget Campaign also issued a Statement of Corporate Responsibility Principles:

  • Businesses that get government subsidies and tax breaks should be required to deliver on their promises to create and retain jobs in New York State.
  • Businesses that get government subsidies and then fail to live up to their promises to create and retain jobs should be required to refund their “overpayment” to the taxpayers.
  • Publicly traded corporations that are currently required to disclose the amount of federal income taxes paid should be required to do the same at the state level.
  • No taxpayer subsidies should be given to businesses that violate federal and state laws relating to the environment, safety and health, workers’ rights or civil rights.
  • State tax incentives must be designed to support job creation not job elimination.

1999 Corporate Accountability Legislation

Corporate and Financial Accountability Act – A3325 (Bragman) / S1988 (Stachowski) – Would require any state agency which distributes state assistance for the purpose of economic development to develop a financial accountability policy. This would include recovering such assistance if the recipients fails to meet the agreed upon terms (e.g., number of jobs created or retained, or other performance standards), and requiring applicants to provide information regarding history of job creation and retention, OSHA violations, equal employment opportunity credits and environmental standards (does not deny award based on violations). Denies future assistance for five years if subject to recoupment procedures.

The Investment Tax Credit (ITC) Accountability and Job Creation Reform Act – A6736 (Ortiz) – Currently businesses are allowed an investment tax credit equal to 5% of the money that they spend on plant and equipment. Under the proposed legislation, the amount of the original ITC would be reduced from 5% to 1%, but an Employment Incentive Credit would be available for up to 12 years, depending on the firm’s level of employment growth. The proposal would also eliminate the ability to carry unused credits forward to future years. This would base the ITC on job creation and retention.

Job Creation Performance – A1548 (Luster) – Applications to the Urban Development Corporation shall require information related to the applicant’s history of performance in contributing to job creation, economic stability, child care and community revitalization. Approval shall be based on such information.

Corporate Tax Disclosure – A5026 (Brennan) – There are huge, profitable corporations who pay little if any taxes on the income they may in New York. These companies shift their taxes to us while they jobs out of New York. This legislation requires certain publicly traded corporations to file reports on tax payments and finances. Information would include: total gross profit; any deduction or tax credit more than 5% of tax bill; any tax credit carryover or unused credit of more than 5%; and net taxable income.

Residency Requirements for Businesses Receiving Government Subsidies – A6090 (Magee) – Companies that receive corporate economic incentives from New York State need to ensure that those incentives are invested in New York. Establishes a residency requirement for state economic development assistance from the department of economic development, job development authority, science and technology foundation, and urban development corporation. If company receives an economic assistance award of more than $50,000 and moves out within 10 years, would be require to repay with 5% penalty and be prevented from receiving such assistance in the future.

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Testimony before the Assembly Standing Committee on Economic Development, Job Creation, Commerce and Industry and Assembly Committee on Small Business

May 11, 1999. The Upstate Economy: Testimony delivered by James Parrott, Deputy Director and Chief Economist, Fiscal Policy Institute, Albany, New York.

Thank you for the opportunity to testify on the economic development challenges facing Upstate New York. The lagging performance of the upstate economies is a serious issue. Weak job growth for an extended period in the 1990s has restrained income growth and the resulting lack of job opportunities has, unfortunately but not unexpectedly, led many people to give up entirely on New York and move elsewhere. Our state has the dubious distinction of leading the country in the rate of domestic out-migration of population in the 1990s. And last year, as the notice for this hearing indicated, we saw the labor force actually decline in many upstate metropolitan areas.

Concerted action to revitalize upstate economies is needed before this brain and skill drain worsens, putting a turnaround beyond reach. Given the powerful influence of national and international economic forces beyond the control of State government, it is imperative that the State judiciously plan how it will deploy its resources to improve, at the margins, regional and State economic performance. In recent years, the State has chosen to focus on massive tax cuts and a corporate retention approach geared to financial services. I would argue that these policies have had very little real impact on the state’s economy and have clearly failed to rejuvenate the upstate economy.

Earlier this year, the Fiscal Policy Institute included its analysis of the data on the state of the Upstate Economy in its briefing book on the 1999-2000 Executive Budget and we have attached that publication to our testimony for your reference. Also attached is a copy of the revenue section of this year’s Counterbudget, in which we set forth our analysis of why the Pataki tax cuts are not achieving the results which their advocates promised. In today’s testimony, we will not repeat these analyses. Rather we will focus on the important purpose of this hearing as stated so clearly in your hearing notice: “to examine proposals to improve the Upstate Economy.”

Without attempting to be definitive regarding a comprehensive State economic development strategy, I will discuss today two areas of economic development policy, industry clusters and high technology, that hold significant promise. The

Fiscal Policy Institute’s executive director, Frank Mauro, will be testifying at your Syracuse hearing on May 20 on the use of tax policy to stimulate the upstate economy and several related issues.

First, the Empire State Development Corporation’s Strategic Plan from February 1996 emphasizes the value of pursuing an industry clusters approach. Yet, this emphasis is not evident when the State implements its economic development priorities. Competitive advantage increasingly depends on developing and capitalizing on technologically-oriented workforce and entrepreneurial skills. In a global economy, those skills are the major assets of our State.

An industry clusters approach focuses attention on just those workforce and entrepreneurial skills and how to develop them further and address barriers to their development. To be effective, this strategy depends on the leadership of small and medium-sized firms coming together to discuss common concerns, identifying opportunities and working with government to address skills training or other infrastructure needs, regulatory issues, and joint marketing or strategic business partnerships. In practice, an outside party, which could be government or an academic or industry consultant, is often necessary to initiate the formation of an industry cluster self-help organization. In the late 1980s, the State sponsored the Strategic Industries Group Services program to encourage the creation of such industry groups.

In the 1980s, I was the representative of the International Ladies’ Garment Workers’ Union to the Garment Industry Development Corporation (GIDC) in New York City, an organization involving industry, labor and government that is often cited as one of the leading examples in the country of this sort of industry self-help organization. GIDC provides training programs for workers and management, assistance in identifying and introducing new technologies and tapping export markets, and is constantly seeking innovative ways to expand New York-based apparel production.

The second area I would like to discuss is high technology. I view high technology not so much as a specific group of industries such as biotech or electronics, but as the application of a variety of technologies and related skills needed to produce high value-added goods and services. In addition to helping facilitate greater investment in high technology industries, the State should support the development of high tech skills across the spectrum of export-oriented industries. In particular, it should substantially expand funding for employer-specific training through the community college system. If designed with business and labor input, employer-specific training can be, as a recent report from the State Comptroller indicates, “a powerful economic development tool”. (1) Such training is one of the most cost-effective investments that can be

made in increasing the technological proficiency of our existing workforce, raising the productivity and earnings of our workers and addressing business’ growing need for more skilled workers.

Other institutions that are critical in helping New York’s businesses in applying new technologies to maximum advantage in our workplaces are labor unions and technology extension programs. Consequently, I think that the State’s technology focus should include support for innovative labor-management partnerships fostering new workplace technologies. The State also should increase funding for the network of technology extension centers that assist small and medium-sized companies by providing a range of engineering and technical assistance that enhance their competitiveness. (2)

In closing, I would like to comment on the division of labor between the State and local levels in conducting economic development efforts. Creative and committed leadership at both levels is essential in the development and execution of a strategic plan. There needs to be overall coordination at the State level and the State should provide the lion’s share of the resources needed. Local leadership is critical for industry self-help partnerships and coordination with local governments and educational institutions. Needless to say, the legislature and the Comptroller’s Office have important oversight roles to ensure periodic evaluation and accountability.

For additional information contact:

Frank Mauro, Executive Director Fiscal Policy Institute One Lear Jet Lane Latham, NY 12110 phone: 518-786-3156 fax: 518-786-3146 e-mail: fpi@albany.net

James Parrott Deputy Director and Chief Economist Fiscal Policy Institute 218 W. 40th St., 3rd floor New York, NY 10018 Phone: 212-730-1551 fax: 212-819-0885 e-mail: jparrott@uniteunion.org

Notes

(1) New York’s Community Colleges: Cost-Effective Engines of Educational Access and Economic Development,” State Comptroller H. Carl McCall, March 1999.

(2) See James A. Parrott, “Labor Unions, Technological Change, and Economic Development in the New York Tri-State Region,” in Technology and Economic Development in the Tri-State Region, Collected Background Papers for the New York Academy of Sciences Roundtable Series, New York Academy of Sciences, 1997.

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