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.