Are We Winning the Economic Development Game?

by RaeAnne Marsh

Economic-Development“The state that made the most aggressive, best moves competitively is Arizona,” states Barry Broome, CEO of the Greater Phoenix Economic Council, singling out the tax and economic policies of the past five years. In his view, they comprise the single most positive impactful decisions the state has made in 30 years “because they were governed by what will grow the economy around advanced industries.” 

But high-tech businesses need a highly qualified work force; by 2018, it is expected that two-thirds of jobs will require education beyond high school. That is the other factor in achieving strong economic development. Says Hank Marshall, economic development executive officer with the City of Phoenix, “Our biggest challenge as a city and a region is the ongoing need of a highly skilled work force.” Noting the Greater Phoenix area ranks 67th in educational attainment among the top 100 metro areas in the country, he says, “The quality of the locates we get is directly correlated to our level of achievement in education. It’s why we get a lot of distribution and call centers but not corporate headquarters.”

Eileen Klein, who left Governor Brewer’s office as chief of staff last year to become president of the Arizona Board of Regents, relates that the impetus for changing the state’s economic policies was “we realized more needed to be done in terms of state competitiveness, to make sure we had a favorable regulatory and tax climate so people saw Arizona as welcoming to business, an easy place to start a business and an easy place to grow business.” This required significant changes in both corporate and — because businesses are formed by individuals — individual income tax. Also important, she says, was completely renovating the economic development model at the state level, replacing the Department of Commerce with the Arizona Commerce Authority, a public-private partnership created to aggressively recruit quality jobs and capital investment.

However, Klein emphasizes, “Out of all this conversation, it became apparent that all of the successes would be helpful and would advance Arizona, but nothing could get us where we needed to be if we did not reform our educational system.”

Efforts in this area have begun. In 2010, the Board of Regents established for the first time a comprehensive plan from pre-kindergarten through college to establish goals and outcomes that centers on increasing the number of college graduates, both associate and bachelor degrees. And Klein along with leadership from the universities and community colleges sit on the ACA Board of Directors. “We’ve become a big part of the deal-making that goes on with the ACA in terms of attraction or retention,” Klein says, explaining their concern is how to partner and transfer and commercialize the ideas and breakthroughs generated at the colleges as well as meeting Arizona’s labor and workforce needs. 

Changes have been dramatic, but the payoff so far is less so. Employment is growing at about 2 percent, the same as last year, which economist Jim Rounds, vice president of Elliott D. Pollack & Company, characterizes as mediocre and puts us at about 15th nationally. And Mike LeVault, chairman of the Maricopa Association of Governments and Mayor of Youngtown, points out our job creation in the past four years is mostly lower-paying, unskilled positions. “Not the kind of jobs we want for a brighter future.” He cites the recent report from the joint legislative budget committee that state revenues last year grew only 2.4 percent. “We need to change direction or face as much as a $1.4-million deficit by 2016.” 

Population growth is also critical, according to Rounds. “Economic reform by the ACA inches us forward, but we can’t change the economic base overnight. We are still dependent on population growth in a lot of areas.” And the population, he says, is growing at only about half of what we would normally experience at this time in the business cycle.

What We Have Going For Us

“Seven years ago, we did not have the economic development tools. Today, the state and region have done a nice job of stepping up with those tools,” says William Jabjiniak, economic development director for the City of Mesa. “We’re now much more on a competitive scale.”

The most significant of those instruments make up the Arizona Competitiveness Package, which was adopted in 2011. Calling it a “turning-point economic development legislation,” ACA President and CEO Sandra Watson emphasizes its importance. “It provided a suite of tools for Arizona to compete in the global marketplace. It overhauled our tax system, streamlined our regulatory structure and honed our focus on business recruitment and retention to put Arizonans back to work.” Its many elements include changes in corporate and property tax rates, tax credits, continuation of the state’s highly regarded job training program and a “deal closing” fund.

Rounds notes the importance of economic development organizations ACA and GPEC using these tools to focus on the higher-value-added industries, the higher-wage industries that invest more. They create a ripple effect. “Retail and other businesses will come because of these other higher-value-added businesses that come here or expand here, or smaller businesses that expand and decide to stay here.” 

He also notes that we need to emphasize getting a return on our investment, observing that it’s possible to calculate tax collections and so make sure we’re not giving away more than we’d be getting in return. Pointing out that a company has to want to be in a particular place, at least to a certain degree, or that location would not even be considered, Rounds says, “If we go after those companies where it actually would make economic sense to locate here, we don’t need to give away as much to the company.” He cautions being careful in what we give away, pointing out we gave incentives for First Solar, whose facility is now being used by Apple, and that the amount of economic development funds we have are no match for Texas. But, he says, “We can compete in terms of fundamentals, such as roads and a trained work force.”

“Greater Phoenix has very good infrastructure — outstanding airports, light rail, a terrific freeway system — but we need to keep up on that,” Broome says, sharing, “I worry that, over time, that will be something that’s compromised.” He sees the next challenge as improving the infrastructure inside cities, such as around the light rail in Phoenix, and paying attention to neighborhoods. Observing that homeowner associations are a good model, although extreme, he says, “If you continue to focus on home ownership and housing code enforcement, those neighborhoods will stay strong and cities will continue to attract young, middle-class families, and you’ll have a much more interesting path forward as a community.”

A lot of economic development hinges on what happens at the community level, and Jabjiniak identifies two areas in which communities make a difference: building proper infrastructure, which includes roads, water and sewer, dark fiber, electricity and, yes, even streetscapes; and putting entitlements in place in a very efficient manner. Also, he says, “We can step in with workforce assistance, and look at specific needs a company has.”

Regional Commitment Is Power

Another asset is our greater community. “I’ve been impressed most with the willingness to come together and act as a region,” says LeVault, acknowledging past tension between the East and West Valley regarding resources. “The Greater Phoenix Metro Area has such huge unrealized potential,” he says. “The more we’re willing to work together, the more likely it is we’ll realize our true potential.” For the small community of Youngtown, for instance, “everything that happens in the Valley improves Youngtown residents because we’re highly mobile.”

As Marshall puts it, speaking of the City of Phoenix, “We have a world view, a city focus, but we’re regionally committed.” He relates that, at a recent meeting of MAG, several mayors discussed their cities’ implementation of a self-certification process patterned after one the City of Phoenix had pioneered, and very pointedly thanked Mayor Stanton for Phoenix’s openness in showing them the software, methodology and how to get it done. “They told him, ‘Thank you for allowing all of us to achieve that level of service delivery, capability and sophistication.’” By sharing of best practices with neighboring communities, he says, “We’re all better off.”

MAG itself has changed in fundamental ways, LeVault says. Previously, the association had allowed transportation construction to sprawl in many different directions. Now, LeVault says, “We’re more focused on where we want economic development to occur and what kind, and we plan the transportation infrastructure to serve those areas.” There is already evidence of profound commercial development along Loop 303 in the West Valley, with car dealerships and retail centers beginning to locate there, and there are plans for a Grand Avenue corridor as a tie from Wickenburg into Phoenix.

LeVault also cites MAG’s success in coming up with a plan the Environmental Protection Agency accepted for dust control, a problem seemingly at odds with development because “every time we break the desert crust, we create dust.” It was a collaborative effort among cities, towns, counties and businesses, and LeVault says, “It we hadn’t resolved the issue with the EPA, there were hundreds of millions, if not billions, of funds in jeopardy.” MAG has also been involved with the creation with Mexico, this year, of the Arizona-Sonora Binational Megaregion, whose purpose is to increase trade in the region. Noting government’s important function as a facilitator, LeVault says, “Economic development will come from a collaboration of all sectors of the economy — government, business, the education system, and organizations like GPEC.”

Tales of Three Cities

GPEC is well-known as a force in new business attraction to the Valley of the Sun. It also provides data and analysis for individual communities and helps them build their economic development plan. But, notes Broome, “It’s the city economic development people and their chamber partners who sit down with companies to solve their problems.”

City of Mesa

“It’s sexy to go and attract that big, new company, but having a dialog with existing companies is important,” Jabjiniak says. In fact, he adds, “The bigger growth is in working with the existing business community — 80 percent.”

But at the same time, he says that as the state and region move forward in aerospace and defense, healthcare, advanced technology and other sectors identified as strong, “We want to be front and center and in partnership with them.” 

In that spirit is Mesa’s HEAT (a four-letter acronym for Healthcare, Education, Aerospace, Tourism and Technology) Initiative. The education component has gotten attention across the country, Jabjiniak relates. “A couple of years ago, we went after legacy-based institutions — liberal arts schools from the Midwest and Back East that have been around for a long time — to bring them here to complement, not compete with, existing universities.” Twenty-six institutions expressed interest, and Mesa ultimately recruited four: Benedictine University, whose undergraduate academic programs include communication arts, accounting, and management and organizational behavior; Wilkes University, with offerings focused on STEM and which opened its Mesa campus at the graduate level first; Upper Iowa University, focused on nursing , public administration and public safety degrees; and Albright College, offering courses from psychology to information technology.

“We worked in unison with them, and now we’re focused on helping them succeed,” Jabjiniak says. That help included renovating city-owned property and letting the schools lease from the city. “Keeping their overhead down while enrollment grows is key,” he says. “Therefore, we put the capital cost on our books as we financed the renovation. They simply pay for the space they’re using going forward. It has worked out really well.”

City of Chandler

“Competition since the recession has become more intense on what the state and the community are willing to do to land big companies, but they don’t always make financial sense for the community,” says Christine Mackay, economic development director at the City of Chandler. She notes Chandler did nothing differently during the recession in its attraction and retention efforts but it was the No. 1 city in Arizona, and 99th in the country, to recover. “We kept a nearly myopic focus on creating and retaining good-quality jobs and capital investment and reinvestment in high-wage sectors.”

Within those efforts has been an emphasis on creating a cluster economy — businesses that support each other and that involve skills that can absorb each other’s skills, in disciplines that complement and translate well with each other. As example, Mackay points to all the vendors, manufacturers and support services that established themselves near Intel, creating additional jobs and capital investment and resulting in a thriving high-technology manufacturing cluster. Then other manufacturers follow, in what Mackay calls the “Nordstrom effect.” “Chandler is a strong representation of how vibrant a cluster economy can be,” she says.

Noting, “It’s important to brand who you want to be,” Mackay says economic development decisions were based on where the city leadership wanted the city to go. And a key part of that was creating a place where a quality work force would want to live, because, she observes, “Companies go to be near the work force.” Fifty percent of the economic development campaign is spent on recruiting companies, and fifty percent on recruiting the work force to live in the community.

Tools are in infrastructure, with robust capital investment programs that allow the city to get out ahead of development. To that end, the Economic Development Department is involved in city planning discussions. “We know where the sites [of employment corridors] are and where the jobs are going to go; have known for decades,” says Mackay.

City of Phoenix

“Phoenix is the sixth-largest, fastest-growing city,” Marshall says. The city is building on an already established core competency in bio-life sciences, with a new cancer center being finished and other construction slated related to the Phoenix biomedical campus downtown and a biomed corridor by the Mayo Clinic in northern Phoenix.

Phoenix has also begun aggressively trying to expand its co-working space, incubators and accelerators, Marshall says, “to make sure we have the right mix of options to encourage entrepreneurs and advance growth in emerging enterprises.” He relates that many national brands are seriously considering Phoenix, realizing the potential that exists woven within public, private and educational organizations.

In addition to the business attraction component of economic development, Marshall notes the city has a strong retention and expansion program. Its most significant tools are city services and assistance, and Marshall illustrates this with the experience of a company he describes as “the fastest-growing company in the City of Phoenix”: “Their problem was street parking, and we rectified it,” he relates. “We didn’t give them money; we just fixed the problem.” He notes the importance of getting to know the companies on a personal level, small and medium-sized businesses as well as the large ones, to understand and help resolve their issues.

Marshall also points to the success of a program Phoenix also initiated about a year ago — the Sector Partnership — which it debuted with the healthcare sector. Observing, “There are a lot of businesses and jobs tied to the healthcare sector,” Marshall says the standard approach would have been to meet with every business individually and learn about the sector incrementally, but “if we convene everybody, we could try to address issues in a unified way.” There was a lot of skepticism at first, especially among businesses that were competitors, but Marshall reports it is now thriving and growing, and is soon to be rolled out in other sectors. “They get a larger voice and have more input, and they take ownership of things they can change.”

Image Matters

“We need a more positive image of Arizona,” Rounds states. As an economist, he talks to site selectors, economic developers and company executives. Pointing out that people have to be thinking about Arizona so we make that Top 10 list when they are ready to begin collecting economic development data, he says, “They have to be interested in Arizona and intrigued for more.”

But it’s a much bigger picture than just the regulatory side. Broome, who characterizes Arizona’s tax and regulatory position as “best in class,” notes, “When we create this amazing business platform, it should be what we’re known for, but when we back it up with volatile political controversy that conflicts with our ability to attract and grow talent, we end up hurting ourself.” In particular, he points to our “big three: 1070, 1062 and John Huppenthal,” the first two of which polarized Arizonans around issues of immigration and the LGBT community, respectively, while Huppenthal’s posts generated heat as much for the content of his statements as the clandestine manner in which he made them.

“Running 1062 through and putting the state in a ‘here we go again’ mode while we’re trying to recruit Microsoft and eBay and Cisco and companies out of markets that care deeply about that issue [LGBT] — you’re neutralizing your advantage when you don’t look at the complete interest of the companies,” Broome says, explaining that, however advantageous our tax and economic policies are for companies such as Apple, attracting them requires understanding the full spectrum of their needs. For instance, he points out, Apple is so aggressive about being inclusive for LGBT in the workplace, it won’t accept as a supplier any company that doesn’t have an LGBT program and outreach program. “So Apple comes in and makes a huge investment, they get all the tax and economic benefits, and then we have policies come crashing through that counteract their ability to attract talent and grow talent.”

Activities that create a hostile environment for people have diminished Arizona’s brand and reputation, Broome finds. “So now we’ve done the tax and economic policy right, we have to do the work environment right, we have to do the culture right, we have to do the human capital right.”

Our Place in the Race 

“Phoenix is the 12th-largest MSA [metropolitan statistical area] out of 380 in the U.S.,” says Marshall. And we seem to be riding well on the trending tide of technology-based economic development, “manifested by Silicon Valley Bank committing $100 million in funds to invest in technology and life science companies in Arizona, and committing 250 employees of its own to make it happen.”

In the competition to attract new companies, Texas regularly emerges as one of the top contenders. Broome believes that Texas’s brand is better — and it gets higher-profile announcements — but Arizona is better from a tax and economic standpoint. “Almost every single transaction and investment that’s made in Arizona, we’ve beaten Texas to get them,” he says. And Jabjiniak underscores the value of our infrastructure against Texas’s deep pockets for funding in stating, “There’s a lot of oil money in Texas, but I’d put my cost of electricity against Texas.” And he adds, “I’m very proud of the fact that we can compete against Texas.”

Jabjiniak also notes Arizona’s strength in data centers, for which he lauds the state for creating tools to facilitate their growth. “They don’t create a lot of new jobs, but they create a tremendous amount of capital investment for us.” In fact, in the year since the state legislature passed a package of tax incentives for the industry, 26 new megawatts of data centers have opened, with an economic impact of tens of millions of dollars. [Editor’s note: See our article also in the September 2014 issue on the call center incentive package, ” New Law Encourages Data Centers.]

Arizona has long-range plans in place, Klein says, “because we have gotten more focused at the statewide level with a comprehensive economic development plan, are doing a better job of coordinating with local economic development agencies, and have a chance to think comprehensively about the major factors that will improve our competitiveness.”

Klein also points out an advantage distinct to the Greater Phoenix area: being right in the heart of the corridor of the Intermountain West, which, she says, will be the growth corridor for the U.S. Additionally, Phoenix offers convenient access to the major technology centers in California. Geography also makes Phoenix “a great way to connect between Mexico and Canada,” she notes, especially with the focus on the Interstate 11 corridor to improve access to Mexico and, potentially, to Canada along with other commerce-related advantages. “As Arizona grows and the metro region between Phoenix and Tucson grows, we’ll have people who want to be located here to be in the center of all that.”

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