Changing of the Guard: Economic Development in PA

 

A Brief History of PA Economic Development Efforts

Last week, the Pennsylvania State House passed a bill establishing the Industry Partnerships Program, an initiative that first surfaced in Governor Ed Rendell’s 2005 Job Ready platform.   Its content is not important for our discussion today.  What is important is that once again, policy makers are getting ready to tackle the issue of job creation and economic development in the Commonwealth.

With every recession comes a flurry of legislative activity aimed at jump starting the economy in Pennsylvania.  Heck, former Governor Robert P. Casey even called his signature economic development program Operation Jump Start.  Nothing subtle there.  But as we prepare for the next gubernatorial administration to ride into town with thoughts and ideas of their own, we thought it might be a good idea to tell you where we have been on economic development, so as to give us all a better idea of where we might be going.

Pre-1980

Let’s start with Pennsylvania government before the 1982 recession, as we believe it provides a solid foundation for what transpired over the next 30 years.  Pennsylvania was still predominantly a manufacturing state, with heavy industry, mining, steel and rail accounting for most of the economic activity.  Global competition was a distant dream at that point (although it may have behooved the steel industry to dream a little faster.)

There was little need pre-1980 for Pennsylvania government to provide much in the way of direct incentives to businesses to either stay in or locate to Pennsylvania. One notable exception was the Pennsylvania Industrial Development Authority (PIDA) which was established in 1956 to provide low-interest loans for manufacturing and other industries.

Another exception occurred in the 1970s, when Governor Milton Shapp successfully lured Volkswagen to southwestern Pennsylvania with about $250 million in direct state investments.  This move would foreshadow the state-to-state bidding wars that would permeate the 1980s through today. 

But direct state investments were by no means the norm until Governor Dick Thornburgh came to town, signaling a sea change in economic development policy.

Economic Development Program Expansion: Thornburgh

Pennsylvania policy makers became active players on the economic development front during the 1980s as a result of several factors.  First, the aforementioned global competition (along with other factors) brought the steel industry to its knees, causing a ripple effect across all economic sectors, including mining.  Second, the 1982 recession rocked the industrial and manufacturing base with high unemployment due to plant closures.  Finally, organized labor began to lose its hegemony in the state due to declining membership, and for the first time, manufacturers began locating facilities in places where labor costs were much cheaper (i.e. Right to Work states.) Western PA denizens can probably regale you with stories about how fledgling automaker Saturn decided to locate its plant in Spring Hill, Tennessee instead of western Pennsylvania. 

These factors led the Thornburgh Administration to work with Democrats in the legislature (most notably House Majority Leader Jim Manderino) to float $190 million in bonds, allowing the government to create several programs to provide capital to businesses through loans and grants.  Funding was also included to provide financing for business infrastructure needs.  In addition, funding flowed to regional economic development needs to local economic development districts through the Appalachian Regional Commission (ARC) Program. 

Finally, in 1983, Thornburgh and the General Assembly dipped their collective toes into technology-based economic development with the creation of the Ben Franklin Technology Partners.  The BFTP provided tech companies with start-up and early stage capital, as well as business and technical expertise.

1990s Recession: Casey at the Bat

When Governor Casey took office, many of the Thornburgh-era economic development programs had lapsed.  Casey then put additional programs in place to try to help retain and create jobs in PA, which was still reeling in many geographic areas around the state.  These programs included grant and loan programs for infrastructure, business incubators and startups, and working capital and tax incentives.  The era of state government making direct investments in business development and retention had truly begun.  Next, Casey formed the Governor's Response Team, a cabal of economic development professionals housed in the old Department of Commerce.  The sole purpose of this group was to put state incentive packages together for companies to keep them in or attract them to the Commonwealth.

Casey also sought to put his own stamp on economic development efforts by creating the Industrial Resource Centers to provide a broad range of technical assistance and guidance to small and medium-sized manufacturers.  Of course, as was the case with most programs, the IRCs did not replace the BFTPs, because very few economic development ideas ever go away: we just add more on top of what we already have.

When the 1992 recession finally subsided, the American economy began to grow based largely on the emergence and rise of new technologies and industries, like finance and computer technology.  At first, this trend did not do much for Pennsylvania, as we continued to lag behind many other (O.K., almost all other) states, because we still suffered from the loss of hundreds of thousands of jobs in the steel and coal industries.  But with better federal revenues flowing into the state, incoming Governor Tom Ridge found himself in the unique position to be able to both cut taxes and expand economic development efforts.

The Ridge Years

While Ridge was certainly busy cutting the Corporate Net Income Tax and phasing out the dreaded capital Stock and Franchise Tax, he also began a trend toward centralizing economic development efforts under the Executive Branch.  Gone was the old "Sunny Day" program, a process by which the Governor would submit lists of economic development projects to the General Assembly for approval.  In its place was the Opportunity Grant Program which gave the new Department of Community and Economic Development wide ranging discretion over all job creation efforts. Other changes included re-branding the Governor's Response Team as the Governor's Action Team, armed with dozens of economic development incentive programs.

Ridge was perhaps most aggressive do date at trying to attract companies from other states through direct investment.  Another Ridge-era entity,Team Pennsylvania, was formed as a government/business partnership to serve as a resource for companies looking to come to Pennsylvania.  Finally, and perhaps most importantly, Ridge took the Thornburgh bond-floating to a whole new level.  His Administration made heavy use of debt ceiling increases to float bonds for large, high profile projects such as ship yards, new stadiums and convention centers.  This Capital Budgeting process would continue, and increase, during the next Administration.

Rendell Redefines Economic Development

By the time Governor Ed Rendell came into office, DCED had over a 100 different programs, funded through dozens of budgetary line items.  While the Governor's Office had gained control over many economic development programs, the General Assembly had also found a way to fund its own economic development priorities through the state budget process.  The Rendell Administration believed there was still a need for a major direct investment in economic growth.  This aggressive stance gave birth to the Rendell Stimulus Package, a heretofore unheard of $2 billion bond program for site development, venture capital, agriculture and tourism industry incentives, and high-tech company investment.  Later, Rendell championed and won approval for direct investment in hospitals and water/sewer infrastructure.  

And while it was certainly notable that the Rendell Administration was successful in providing for the largest economic development program expansion in the state's history, the more significant policy implication was the structure created to govern the release of the funds. 

Instead of funding decisions coming from DCED, a new authority was created to make those decisions.  At the behest of legislative leaders, the Commonwealth Financing Authority was established as a seven member board of executive and legislative appointees.  Unlike other state boards, however, each legislative appointee to the board was statutorily given veto power over any board decision.  In essence, the Legislature was now on a more equal footing with the Governor in economic development policy.

Summary

This brings us to today, where most of the Rendell-era programs are winding down, and the General Assembly awaits the economic development priorities of a new administration.  With unemployment still high and job creation sluggish, expect economic development discussions to dominate the governor’s race.  Later this week, we’ll tell you where we think it all ends up.