Benchmarking Arizona economic development: creating more strategic governance and investment policies

              Benchmarking Arizona Economic Development: Creating More Strategic Governance and Investment Policies

July 2005

Prepared by



Kenneth E. Poole, Ph.D. Pofen Salem, Ph.D. Yasmin Bordas



PO Box 407 � Arlington, VA 22210 703-522-4980 � www.accra.org



Benchmarking Arizona Economic Development: Creating More Strategic Governance and Investment Policies

July 2005

Prepared by Kenneth E. Poole, Ph.D. Pofen Salem, Ph.D. Yasmin Bordas ACCRA

PO Box 407 Arlington, VA 22210 703-522-4980 www.accra.org



Peer reviewed by the Arizona Department of Commerce Economic Research Advisory Committee:

Dan Anderson Assistant Executive Director for Institutional Analysis Arizona Board of Regents Kent Ennis Economic Consultant CH2M Hill William P. Patton, Ph.D. Director of Economic Development Tucson Electric Power Marshall Vest Director, Economic and Business Research Eller College of Management University of Arizona Brian Cary Principal Economist Arizona Joint Legislative Budget Committee Wayne Fox Director, Bureau of Business and Economic Research Northern Arizona University Elliott D. Pollack Elliott D. Pollack & Co. Lisa Danka Director, Commerce & Economic Development Commission Arizona Department of Commerce James B. Nelson Economic Development Manager Salt River Project Brad Steen Chief Economist Arizona Department of Transportation Jim Wontor Advisor, APS Forecasting Arizona Public Service



Don Wehbey Economist Research Administration Arizona Department of Economic Security



 2005 by the Arizona Department of Commerce. This document may be reproduced without restriction provided it is reproduced accurately, is not used in a misleading context, and the author and the Arizona Department of Commerce are given appropriate recognition. This report was prepared for the Arizona Department of Commerce with funding from the Commerce and Economic Development Commission. Elements of this report may be presented independently elsewhere at the author's discretion. This report will be available on the Internet for an indefinite length of time at http://www.azcommerce.com. Inquiries should be directed to the Office of Economic Information and Research, Arizona Department of Commerce, (602) 771-1164.

The Arizona Department of Commerce has made every reasonable effort to assure the accuracy of the information contained herein, including peer and/or technical review. However, the contents and sources upon which it is based are subject to changes, omissions and errors and the Arizona Department of Commerce accept no responsibility or liability for inaccuracies that may be present. THIS DOCUMENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY. THE ARIZONA DEPARTMENT OF COMMERCE PRESENTS THE MATERIAL IN THIS REPORT WITHOUT IT OR ANY OF ITS EMPLOYEES MAKING ANY WARRANTY, EXPRESS OR IMPLIED, INCLUDING THE WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR ASSUMING ANY LEGAL LIABILITY OR RESPONSIBILITY FOR THE ACCURACY, COMPLETENESS, OR USEFULNESS OF ANY INFORMATION, APPARATUS, PRODUCT, OR PROCESS DISCLOSED, OR REPRESENTING THAT ITS USE WOULD NOT INFRINGE PRIVATELY OWNED RIGHTS. THE USER ASSUMES THE ENTIRE RISK AS TO THE ACCURACY AND THE USE OF THIS DOCUMENT AND ANY RELATED OR LINKED DOCUMENTS.



Table of Contents

Table of Contents ............................................................................................................. i Executive Summary ......................................................................................................... i Findings..........................................................................................................................iii Recommendations .......................................................................................................... iv

Investments ............................................................................................................... v Benchmarking Arizona Economic Development: Creating a More Strategic Governance and Investment Policies ....................................................................................................1



Background ..................................................................................................................... 1 Approach and Methodology............................................................................................ 4 Managing State Economic Development........................................................................ 6

Agencies with the Greatest Breadth of Services .......................................................7 Linking Workforce and Economic Development ........................................................8 Taking a Narrow Approach to Economic Development .............................................9 "Privatization" of Economic Development................................................................10 Economic Development as a "Developer" ...............................................................10 Endowing Economic Development..........................................................................11 Unit of the Governor's Office ...................................................................................11 Local and Regional Support for Economic Development ........................................12 The "Commerce" Agency Model..............................................................................12



Comparison of Economic Development Governance Structure ................................... 14

Purpose of the Board or Commission......................................................................15 Role in Governance.................................................................................................16 Makeup and Selection of Board or Commission .....................................................18 Staffing for the Board/Commission..........................................................................21 The Operations of the Board ...................................................................................22



Budget Comparisons ..................................................................................................... 26

The Federal Share of Economic Development Funding..........................................27 State Funding for Economic Development ..............................................................28 Allocating State Investments by Program Functions ...............................................30 Trends in the Allocation of Economic Development Resources ..............................37



Comparing State Incentive Policies .............................................................................. 40

Further Categorizing Financial Incentives ...............................................................41 Structure for Analysis ..............................................................................................42 Incentives Gap Analysis ..........................................................................................46 Implications for Arizona Incentives ..........................................................................52



Findings......................................................................................................................... 54 Recommendations: Alternative Scenarios for Moving Forward.................................. 58

Investments .............................................................................................................58 Investing in High Profile Economic Development ....................................................59



References ..................................................................................................................... 65



Executive Summary

Arizona's economy is changing as it emerges from the economic recession that gripped the nation and churns simultaneously with continued business formations and downsizings. Numerous industries offer key opportunities for the state's future economic success, including computer software and systems; healthcare and biotechnology; industrial machinery; communication services; high-tech instruments; forest products; engineering services such as research and testing; transportation and logistics; agriculture/food processing/agricultural technology; and defense/aerospace/ avionics. 1 These technology-intensive, export-oriented industries will collectively serve to build on Arizona's existing industry base to offer opportunities for future prosperity. The challenge to state leaders is to take full advantage of those economic opportunities by ensuring that the state has critical foundations in place: investments in research and development, a world-class workforce, state-of-the-art infrastructure, a flexible capital system, and access to global markets. To build these foundations requires re-thinking the economic development institutions of the past, including those that have served Arizona well. The purpose of this study is to examine the role and efforts of the Commerce and Economic Development Commission (CEDC) in the context of these economic challenges, proposed strategies for addressing those challenges, as well as the limitations facing state policy makers. This study compares the state's and the CEDC's strategies to those being implemented by Arizona's competitor states in response to the changing US economy. Through this analysis, the CEDC is seeking to clarify the Commission's role, Arizona's competitive challenges, and appropriate economic development investments. This research study compares Arizona's economic development efforts with those being undertaken by Arizona's 18 competitor states: California, Colorado, Florida, Georgia, Illinois, Maryland, Massachusetts, Minnesota, New Hampshire, New Jersey, New Mexico, New York, North Carolina, Oregon, Texas, Utah, Virginia, and Washington. More specifically, ACCRA compared the institutional characteristics and programs of state department of commerce agencies (in their myriad forms) in these 18 states with those offered through the Arizona Department of Commerce and the CEDC. The research team also examined program functions and resource allocations to compare how Arizona allocates its economic development dollars with its competitor states. ACCRA researchers then examined the economic development policy boards or commissions in ten competitor states, and reviewed the role of these boards in providing policy guidance and monitoring business incentive or attraction fund activities. Recognizing that incentives are a commonly used mechanism to attract firms, ACCRA reviewed incentive programs by type of program and policy goal to identify gaps in Arizona's existing incentive programs. Finally, ACCRA identified the most common features, describing "lessons learned" for future Arizona policy making. These lessons provided the framework for recommendations to state policymakers on how the Arizona Department of Commerce should structure its governance and programs to align with the findings of the Statewide Economic Study. Arizona Department of Commerce Arizona has one of the smaller economic development agencies in terms of overall staff size among its competitor states. The agency employs 83 people, slightly less than Utah and slightly more than New Mexico. In part, the agency's small size relative to other states reflects the leaders' decision to separate tourism from economic development. About two-thirds of the competitor states combine these functions the same agency. Although Arizona is nominally a "commerce" agency, it does not manage some of the functions that other state Departments of Commerce have, including business licensing and regulation. Arizona Commerce operates very much like other state departments of economic and community development. Of the 18 competitor states, North Carolina, Washington, Utah and Oregon have the most similar structure



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Economy.com, "Arizona's Economic Future," prepared for the Arizona Department of Commerce, August 2002.



to Arizona's Department of Commerce. In all of the other states, the economic development agencies invest substantially more resources in aid to local communities. Arizona's Commerce and Economic Development Commission (CEDC) The CEDC serves as the state's economic policy and planning board, and it oversees the CEDC Fund, a portion of which is appropriated for Commerce agency activities. The authorized responsibility of fund allocation allows the CEDC to play a critical role in implementing portions of the state's economic development plan and policy. The CEDC was created as a governing body for the Commerce and Economic Development Fund. It is authorized by statute to allocate financial resources in order to help businesses sustain, expand or relocate to Arizona. However, more than 85 percent of the CEDC Fund is appropriated to specific activities even before it is allocated to the CEDC for uses on strategic state projects.2 The CEDC has certain policy advisory functions, including the requirement to develop the state's comprehensive long-range strategic economic plans. Comparing the ten competitor states that have similar boards or commissions, CEDC's dual purpose of managing a specific business attraction fund as well as setting development blueprints for the state appears to be quite unique. In general, most states established their economic development boards/commissions to provide oversight to the state economic development agency's programs and strategies as well as to make policy recommendations to the agency or the Governor. Only a few have any fiduciary responsibilities and their recommendations are advisory in nature. In comparing state boards and commissions, we identified three basic types: (1) Governing Board; (2) Program Oversight and Management Board; and (3) Advisory Board. CEDC is unique because, for the most part, it is an amalgamation of these three types of boards. It has some governing and fiduciary roles, but they are limited to specific programs. It also has direct involvement in selecting the strategic priorities that will shape the state's future economic development direction; however, the Commission has limited responsibility for overseeing the implementation of those strategies. Because it does not oversee the entire agency, we have categorized the Arizona CEDC in this typology as a "Program Oversight and Management Board." The primary difference between the CEDC and other state boards of this type is the CEDC's role in framing the agency's strategy planning efforts. This involvement provides an opportunity for the CEDC to influence the broader agency functions. This dual function suggests that the CEDC may have an opportunity for expanding its role. The true strength of the CEDC depends on the willingness of the governor and the agency's leadership to depend on the CEDC for advice and utilize this input in shaping the state's broader strategic economic development direction and budget priorities. Economic Development Budget In 2004, Arizona allocated $59.3 million for economic development and tourism activities, including about $5.5 million in federal funding managed by the Department of Commerce as well as an additional $16 million for the Office of Tourism. The state's tourism program complements the Commerce Department's efforts, especially business development marketing activities. It is for this reason that many other states integrate tourism within the economic development agency. Arizona's economic development efforts are similar in scope but somewhat smaller than those of its competitor states. The 18 competitor states invested a total of $1.7 billion in economic development. This amount excludes any federal program funding. The average 2004 budgeted state investment in economic development and tourism programs in the 18 competing states was $95.1 million, nearly double Arizona's investment. On a per capita basis, the gap is slightly smaller. Arizona invests $9.73 per capita in 2004, six percent below the $10.38 per capita for the competitor states. Arizona places 14th among the 19 competitors in per capita spending, behind New Mexico (excluding that state's Invest New Mexico fund), Colorado, North Carolina, and



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Virginia. For Arizona, investments in workforce development, community assistance, and tourism account for 86 percent of the total state investment in economic development. If these categories of funding were excluded from our definition of economic development for Arizona and its 18 competitor states, Arizona's budget for core economic development is only $7.9 million or $1.42 per capita. Using this budget number for comparison, Arizona is 17th among the 19 states in per capita spending, ahead of Massachusetts and California (which terminated its state agency). Arizona's Business Incentives Of 17 business incentives identified in Arizona, more than half are tax-based incentives that offer companies tax credits, exemptions or reductions, or refunds on income or property. These incentives aim to leverage business investment in the state. This tax-based approach responds to Arizona's development strategy of making the costs of doing business lower in the state for targeted investors. These incentives are designed to encourage research and development investment, construction activity related to qualified real estate development, purchases of equipment for manufacturing operations, and motion picture production in the state. Arizona implements several of its incentives in targeted geographic locations, including enterprise zones, foreign trade zones, and military reuse zones. The goal is to attract business capital investment and jobs to areas that might not otherwise appeal to private investors. Because the state relies so heavily on tax-based incentives to implement its economic development efforts, its incentive programs may not be matched well with effective approaches to achieving the state's economic goals. In general, tax incentives tend to be more effective for traditional, mature industries and tend to be less valuable for emerging industries dominated by technology-intensive firms that may not yet earn adequate revenues to be taxable or may depend more heavily on worker inputs rather than capital investments. Because of the focus on technology-based economic development and the challenges associated with using tax policy to direct public and private investment into new idea creation, direct and indirect financial assistance appears to be growing in importance as a mechanism for providing business incentives. This is evidenced by the tremendous growth in state economic development investments since 1998 and the increased usage of strategic opportunity funds in other states to seal large business deals. Arizona is funding workforce and tourism programs at a competitive level, but If Arizona is truly going to compete, it must reconsider the level of investment it currently makes in technology-based economic development initiatives. Direct and indirect financial incentives may be more useful for the technology-oriented strategies emerging as critical elements of the Arizona's economic development future. Arizona's lack of incentives to encourage capital formation in the form of equity (including seed and venture) capital may be an important gap that needs to be addressed. Initiatives designed to encourage researchers to create new ideas, entrepreneurs to commercialize them, and investors to take a financial risk on them are all needed. Other states are creating sizable "deal closing funds" and equity investment funds to respond. Thus, Arizona should also consider an aggressive new strategic opportunity fund aimed not at investing in individual firms, but rather at fostering firms and researchers to collaborate with universities, nonprofit research institutes, and the private sector.



Findings

Based on how economic development is being implemented across the US, there is clearly no single "best practice." However, there are a several key lessons learned that could be applied to an examination of Arizona's approach to economic development policy design and implementation. A few of those follow: Resource Levels Drive the Approach Arizona's limited investment in economic development has driven it to focus on tax-based incentives, which may not be the most effective way to influence business behavior. To truly compete, the state must invest more.



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The Strategic Fund Is Running Out of Discretionary Money The CEDC Fund depends on an erratic flow of gaming revenue at the same time that annual legislative appropriations from the fund is greater than the receipts from these gaming revenues. Based on current forecasts, the Fund could begin to run a deficit as early as 2008 unless its funding mechanism is restructured. A Variety of Challenges Lead to an Array of Tactics Growing businesses face an array of issues. While Arizona has focused its attention on retraining its workforce and promoting investment in targeted areas, these do not respond to myriad challenges that businesses face in a globally competitive climate. Arizona's investments must be made in a flexible and diversified manner. The Relevance of Incentives and Investments to the State's Economic Targets If Arizona's strategy is indeed focused on promoting technology-based development, each of its existing incentive programs should be assessed as to their relevance in achieving this fundamental mission. Many incentives will be found wanting and Arizona will need to consider new ways to encourage business investments in new technology, innovative products, and globally competitive processes. The Emergence of "Deal Closing" Funds Competitor states are making substantial investments in flexible, discretionary funds. Rather than trying to build programs designed to meet pre-determined needs, these funds allow economic development professionals to customize the funding available to the project needs. These funds are invaluable for signature projects that can serve as the basis for forming new clusters or for taking an existing cluster to a new level. They are not without their own risks, however. States must be good financial stewards by establishing clear policies to guide their investment decisions. Techniques for Determining Effectiveness of Incentives Parallel to the emergence of these deal closing funds and the struggles that states have endured with fiscal deficits, effective methods for assessing the impacts of economic development investments must be integrated into the program's initial design. States with effective systems do not wait to evaluate the program after the fact, but incorporate decision-making criteria and information gathering requirements as a pre-condition of making an award. These efforts require expenditure of resources aimed at ensuring the agency is upholding the public's trust.



Recommendations

Building on research conducted as part of the Statewide Economic Study, Arizona has begun to hone in on a number of key targets built in part on the competencies of its university research activities and the emergence of key clusters such as biosciences, advanced communications and information technology, and "sustainable systems" technologies. Common strategies recommended in prior studies include: � � Developing an image for the state in each respective targeted technology, Investing in the state's research capacity associated with that targeted technology through university-based centers of excellence, industry-university partnerships, or demonstration projects, Fostering dialogue and networking among industry, university, and government officials on the challenges and opportunities facing each targeted technology, Ensuring that risk capital is available to aid in the development and commercialization of targeted technologies, and Helping the state's education and training institutions produce world-class workers ready to take the jobs to be created in the industries deploying these technologies.



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The goal of the recommendations of this report is to translate these basic proposals into a framework for designing incentive policies that make a real difference in the Arizona economy.



Investments

The state should depend less on trying to shape economic policy through its tax structure. With less than $8 million going to its traditional economic development functions, Arizona is skimping on its investment and has unilaterally disarmed in the global economic race to build a technologybased economy. If Arizona is to compete, its leaders must decide to invest substantial resources in creating a new economic future. The state's citizens have already said that Arizona should: � � � � Balance the business tax burden to encourage investment by export-oriented, technologyintensive firms; Foster stronger ties between industry and academia; Factor in the state's limited supply of water and private land in the state's strategic decisions; and Recognize the differences between rural and urban areas, including the dependence of rural areas on tourism for their economic base.3



Arizona should first eliminate legislative appropriations from the Commerce and Economic Development Fund (CEDC Fund) that are siphoning strategic resources to pay for otherwise important operational activities. Then, the state should increase the Fund's current annual income from approximately $3.3 million (projected for FY 06) to $25 million to place Arizona in a more competitive position to make critical investments in strategically important economic development opportunities. The expanded CEDC Fund would be used to provide: � � � � � A deal closing fund aimed at supporting public-private collaborations related to the state's targeted investments, A fund to leverage federal dollars into the state, especially for efforts related to the targeted cluster or technology areas; A challenge fund for signature, "economy-defining"4 initiatives in the state's rural areas, Leverage and support for the creation of an Arizona-oriented equity investment fund, and Resources for strategic research, regional collaboration, and continued policy development activities.



Measuring Success The CEDC already has an extensive set of statutory measures used to evaluate project effectiveness. The measures aim to assess the contribution of proposed projects to the state's strategic goals and overall economic well-being. While these measures are useful for traditional economic development efforts, they are limited in their application to many technology-oriented efforts. Additional measures, focused on leveraging non-state investment or improving the state's success in licensing, patenting, and commercializing technologies, may be needed to supplement those already being used. Arizona has made minimal investment in economic development relative to its competitor states. If it is to create the kind of jobs that Arizonans need to support a family in the 21st Century, the state will need to be more aggressive and the Arizona Department of Commerce will need more



Elliott D. Pollack and Company and Pat Schroeder, "Public Outreach, Local Plan Integration And Strategic Findings," Prepared for the Arizona Department of Commerce and the Commerce and Economic Development Commission, October 2003. 4 "Economy-defining" initiatives may or may not be directly related to the state's strategic industry targets, but are of particular interest because they tend to be relatively large and offer the potential for reshaping the local economic base.

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resources at its command. As Arizona invests more public dollars in economic development, it should also continue to be concerned about having the most effective process possible for measuring success. Maintaining the public trust as the state expands its investment in economic development is vital to the CEDC's long-term viability and to ensuring that the state receives the highest return possible.



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Benchmarking Arizona Economic Development: Creating a More Strategic Governance and Investment Policies

Background

The Arizona economy is well on its way to the road to recovery. But, the path is not a simple one as economic churning continues from new businesses forming and more mature ones downsizing. Some of Arizona's economic opportunities in this transformation include computer software and systems; healthcare and biotechnology; industrial machinery; communication services; high-tech instruments; forest products; engineering services such as research and testing; transportation and logistics; agriculture/food processing/agricultural technology; and defense/aerospace/ avionics. 5 Each is a technology-intensive industry, and collectively these industries will quite probably constitute the foundation for Arizona's future economic prosperity. This is not to say, however, that Arizona's traditional industries are no longer vital to the future, but rather that the state's long-term prosperity will depend greatly on how well it adapts to a changing world economy and the emergence of new opportunities. These opportunities will materialize, however, only if the state can foster public/private investments in research and development, prepare a world-class workforce, create state-of-the-art infrastructure, ensure a more flexible capital system, and offer greater access to global markets. As the economy changes, Arizona is operating with an economic development support system developed for its traditional economy. The purpose of this study is to ascertain whether these institutions can continue to work as effectively in the current economic climate as they have in the past and whether the state's economic development system can contribute to a globally competitive, more technologically intensive Arizona economy. The state created the Commerce and Economic Development Commission (CEDC) in 1989 to (1) provide policy guidance through a 10-year statewide economic strategy and (2) manage revenues dedicated to the agency for strategic economic development investments (via the CEDC Fund). The CEDC also serves as a recommending body for the Arizona Department of Transportation's Economic Strength Projects fund. The Fund receives approximately $3.3 million annually, derived from lottery game revenues, loan repayments, capital markets securities fees, and investment income. However, instead of protecting this Fund as a discretionary strategic fund, the legislature appropriates more than 85 percent of those funds to the state's economic development operating activities including the Commerce department's advertising campaign, Main Street program, rural development efforts, and personnel costs. In 2004, less than $750,000 of the CEDC Fund could truly be described as available for discretionary "strategic" activities.6 The discretionary portion of the Fund provides a dedicated revenue stream to help fulfill the CEDC's mission of providing strategic economic development guidance to the state. As part of that effort, the Department of Commerce has completed an extensive Statewide Economic Study. At the same time, the CEDC has recently undergone significant membership changes as commissioner terms expire and the Governor makes new appointments. Furthermore, CEDC staffing has decreased significantly over the past several years, reflecting the state's budgetary realities and the overall fiscal constraints causing the legislature to divert the CEDC's revenues to other Commerce Department activities.



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Economy.com, "Arizona's Economic Future," prepared for the Arizona Department of Commerce, August 2002. Data provided by the Arizona Department of Commerce.



In addition to the confluence of these changes and the resultant financial pressures on the CEDC Fund, the state is also experiencing tremendous economic growth7 as well as new strains on the economy resulting from global competition and technological change. In particular, during the past 15 years, the business environment in the state has changed at the same time as our understanding of what constitutes a successful approach to economic development. The purpose of this study is to update an earlier analysis of Arizona's incentive policies8 and examine the role of the CEDC in the context of the state's economic development challenges, strategies, and limitations. The study also compares Arizona's efforts with initiatives being implemented in other states. Through this analysis, the CEDC is seeking to clarify the state's challenges, relevant competitive pressures affecting state economic needs, and appropriate investments in state economic development efforts. In order to manage the scope of this project, the study team was asked to benchmark the Arizona Department of Commerce and CEDC to 18 other states. The comparison states are listed in Table 1, and were determined to be competitors based the following four key factors identified by previous research9: Table 1: � Economic Diversity: Economic diversity represents the extent to which Arizona's a state's industrial structure approximates the base industrial structure. Technology Fifteen states were determined to be more industrially diverse than Competitors Arizona including: Texas, Illinois, Maryland, Colorado, Massachusetts, California New Jersey, Minnesota, New York, Virginia, Georgia, New Hampshire, Colorado Oregon, Washington, North Carolina, and California. Florida � Educational attainment: Fundamental to the knowledge economy and Georgia technology sector, ten of the competitor states have larger proportions Illinois of population that have completed a high school or more education Maryland than Arizona. States with higher educational attainment levels include: Massachusetts Washington, Minnesota, Colorado, Oregon, New Hampshire, New Minnesota Jersey, Virginia, Maryland, Illinois, and Massachusetts. New Hampshire New Jersey � Geography: Competitor states were also chosen based on their New Mexico location in the western region of the United States, including: California, New York Colorado, New Mexico, Oregon, Texas, Utah, and Washington. Westward US population shifts and proximity to those states suggest North Carolina that other western states competitors for firms and workers. Oregon Texas � Anecdotal evidence: New and emerging competitors, such as Georgia, Utah Oregon, and Florida, were identified during interviews with economic Virginia developers and business leaders. Washington To compare Arizona's performance to that of its competitors, this study examines the following programmatic elements of business investment promotion strategies: � � � � State commerce agency organizational structure; State commerce agency budget and program functions, including the availability of strategic initiatives and attraction funds; Business development incentives; and Institutional characteristics of commissions or boards that provide leadership for the foremost economic development agency.



Robert Franciosi, "Assessing Arizona's Economy: Boom or Bust?" Goldwater Institute, June 2002. This study builds on and updates prior research conducted by the Arizona State University Morrison Institute for Public Policy, "Comparative Analysis and Guidelines for an Arizona Incentive Policy," 1993. 9 The states were primarily drawn from comparisons made in a study by Economy.com, "Arizona's Economic Future," prepared for the Arizona Department of Commerce, August 2002.

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By comparing these programmatic elements for Arizona and its eighteen competing states, ACCRA evaluated the institutional characteristics of state department of commerce agencies (in their myriad forms) in the 18 competitor states. The research team also examined program functions and resource allocations to judge how Arizona allocates its economic development dollars as compared with its competitor states. ACCRA researchers then examined the institutional characteristics of CEDC-like boards in competitor states, and reviewed their roles and involvement with business incentive and attraction fund activities. Recognizing that incentives are a commonly used mechanism to attract firms, ACCRA reviewed incentive programs by type of program and policy goal to identify gaps in Arizona's existing incentive programs. Finally, ACCRA examined a number of best practices to identify "lessons learned" for future Arizona policy making. These lessons provided the framework for recommendations on how the Arizona Department of Commerce should structure its governance and programs to align with the findings of the Statewide Economic Study.



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Approach and Methodology

As part of this effort, ACCRA gathered data about economic development budgets, state agency governance structures, and business incentive programs for each of the 19 states being studied. This information was gathered for the study from both primary and secondary sources, including web sites, agency reports, and interviews with key personnel. To gather information on state economic development budgets, ACCRA conducted a survey of state policy and research offices about their investments in economic development during 2004. In many cases, the policy and research office responded or they helped to gather data from budget officers within the respective agencies. For states not responding to the survey, ACCRA reviewed approved budgets for the agencies to determine budgeted expenditures. In cases in which ACCRA had questions about the approved budget, the consultants submitted the completed survey to agency staff for review and comment. The primary challenge the researchers encountered was obtaining the cooperation of knowledgeable persons within each state. Since the survey form used for the data collection process was designed to provide standardized comparisons across states, it did not follow standard agency budget categories. Consequently, analysts had to make educated estimates of how funds should be allocated across functional areas. Some states were less cooperative than others due to staff limitations or various other reasons so judgments about activity allocations fell to ACCRA analysts. As part of the survey process, ACCRA provided each analyst a detailed description of what items should be included within the various functional areas and verified the data upon receipt from cooperating states. Wherever possible, data was gathered from all of the key agencies or quasi-public entities that provided statewide economic development services. As for the analysis of competitor state boards and commissions, the project conducted extensive reviews of agency websites and interviewed policy and research directors to determine whether an agency had a board or commission of volunteers providing technical or policy input. Of the 19 states included the study, ten boards or commissions were identified as having sufficient similarity to the Commerce and Economic Development Commission for comparative purposes. ACCRA interviewed the chief staff person for each of these boards or commissions using a protocol designed to provide structure in gathering the most relevant data. To fill in the data for the protocol, ACCRA began by conducting an Internet search of state websites, including agency and legislative statutes, to gather as much information as possible about the board or commission from secondary sources. Once the research of secondary sources was exhausted, ACCRA conducted telephone interviews with the chief point of contact or staff person for each of the commissions to validate data gathered and fill in missing data points. The interviews lasted from 20 to 90 minutes. Again, some interviewees were more cooperative than others and were willing to provide much greater detail about how their respective state economic development board or commission operates. ACCRA gathered incentives data by starting with a set of several different incentives directories, including the 2001 National Association of State Development Agencies "State-by-State Guide of Business Development Incentives" and the recent summaries of the incentives in site selection magazines, including Area Development and Business Facilities. Using these as initial guides, ACCRA staff reviewed websites associated with relevant incentive programs, developing a list of more than 480 programs in the 19 states that provide financial assistance directly to a company or indirectly through an intermediary on behalf of a company. For each business incentive, ACCRA gathered information about the incentive program's purpose, description of activities, eligibility requirements, and application information (wherever available). ACCRA then classified the incentives based on several variables, including the status of the program (whether or not it is active), the program category (whether it provides direct financing, indirect financing, or grants to businesses), the type of program (whether it is a bond, a revolving loan, a grant, a loan guarantee, or one of several forms of tax-related incentives), the geographic focus of the program (whether or not it is targeted to a rural area, zone, redevelopment area, etc.) and the policy goal that the



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program intends to fulfill. This database served as the basis for the analysis of business incentive programs. Once the database was completed, it was submitted to policy analysts in each state to review and revise. Some were more conscientious than others in their reviews. Clearly, some programs may not be as effectively marketed on the web as others, and ACCRA could conceivably have missed programs in gathering the information. Furthermore, many states market programs that are rarely used. Data on incentive program use is very limited, thus comparisons of incentives have to focus on whether or not the incentive exists rather than on the state investment made in the program.



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Managing State Economic Development

The Arizona Department of Commerce is organized as a traditional line agency within state government. The Director reports to the governor as a part of her cabinet. The Director's senior management team includes the deputy director and the assistant directors who oversee the agency's five divisions: (1) Planning, Research and Policy, (2) Community Development, (3) Global Business Development, (4) Workforce Development, and (5) Administration. The Planning, Research and Policy division provides the analytic work aimed at sharpening the agency's focus on its primary strategic targets. The division serves the invaluable function of providing guidance to the agency's senior management team on areas of emphasis and direction. The staff for the Commerce and Economic Development Commission operates as a part of this division. Community Development is responsible for providing assistance to communities in the forms of infrastructure development and local capacity building. This is a major component for implementing "place-oriented" development approaches to ensure that localities are "ready" when opportunities arise by having appropriate zoning, prepared sites, and adequate infrastructure already in place. Global Business Development is focused on providing the Department's direct services to companies. It is involved in implementing "firm-oriented" economic development services, including efforts aimed at the attraction of new firms to the state, retention and expansion of existing firms, and the formation of entrepreneurial ventures. This office leads the state's recruitment efforts, helps small and disadvantaged businesses, and builds linkages between Arizona firms and international businesses. Workforce Development manages programs aimed at improving the quality of the workers employed for Arizona companies. These "people-oriented" approaches include policies crafted to support job training, apprenticeships, and training tax credits. Supporting all of these activities is the Administration division. The Division ensures that the agency operates efficiently, managing its accounting, budget, personnel, technology information, financial management, and procurement activities. Although Arizona is nominally a "commerce" agency, it does not manage some of the functions that other state Departments of Commerce have, including business licensing and regulation. Other states' agencies may oversee the banking regulation, utilities, and a variety of licensed professions. For instance, North Carolina's Department of Commerce oversees the administrative elements of these and other activities even though the various regulatory bodies operate fairly autonomously. Instead, Arizona Commerce is structured much more like other states agencies with names such as the "Department of Economic and Community Development." Arizona has one of the smaller economic development agencies among the competitor states. Table 2 reflects that Arizona has approximately 83 employees working in the Department of Commerce, making the agency among the 10th largest economic development agency in terms of per capita employment among the 19 states. The agency employs slightly fewer staff than Utah's Department of Community and Economic Development and more than the New Mexico Economic Development Department. In part, Arizona Commerce's small size relative to other states is the state's decision to separate tourism and economic development. About two-thirds of the competitor states combine these functions into a single agency. How the Commerce Department deploys these employees is quite instructive, especially as Arizona's efforts are compared with others states. Some of the states have broad-based programs while other states are much more limited in their scope. Certainly, the state's population is relevant to the size of the economic development organization, but the political philosophy and culture of the states also strongly influence the economic development organizational structure.



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Table 2: Economic Development Agency Staffing Levels for Arizona and Its Competitor States FTE Staff Positions 340.7a 306.4 110.0 360.0 197.0b 132.0 67.0 445.0 201.0 82.9 255.0 109.0 16.0 40.0 61.0c 55.0d 70.0e 21.2f data not available Estimated Population, 2003g 5,508,909 6,131,445 2,351,467 8,407,248 5,059,375 3,559,596 1,874,614 12,653,544 8,684,715 5,580,811 19,190,115 8,638,396 1,287,687 4,550,688 7,386,330 12,365,455 17,019,068 35,484,453 6,433,422 FTEs per 1,000,000 residents 61.8 50.0 46.8 42.8 38.9 37.1 35.7 35.2 23.1 14.9 13.3 12.6 12.4 8.8 8.3 4.4 4.1 0.6



State Maryland Washington Utah North Carolina Minnesota Oregon New Mexico Illinois Georgia Arizona New York New Jersey New Hampshire Colorado Virginia Texas Florida California Massachusetts



Notes: a Data includes 41.7 contract staff b Data from 2003 for Dept. of Trade & Economic Development; data for Economic Development is not available for 2004 c Data is for Dept of Business Assistance; Data for VEDP is unavailable. d Staff level provided for the Governor's Tourism & Economic Development Division. e Number includes only Enterprise Florida employees, does not include staff in the state's tourism corporation or the governor's economic development staff f All positions have been eliminated in the FY 2005 budget. G Source: US Census Bureau



Agencies with the Greatest Breadth of Services

State economic development agencies can take a variety of forms. At one end of the spectrum are the broad-based extensively integrated economic development functions that tie narrowly defined economic development activities with community, workforce, and tourism related activities. For instance, states like Illinois, North Carolina, Maryland, and Washington, have larger numbers of employees that manage community and workforce development functions within their economic development agencies. All incorporate tourism into their economic development function as well. For example, Illinois represents a broad-based effort to address the wide variety of economic development opportunities. The Illinois Department of Commerce and Economic Opportunities is one of the largest economic development agencies in the nation. Its structure is geared toward supporting business development, economic development, local and regional activities, trade, and technology/industrial competitiveness issues. The agency has sizable programs to support coal development and marketing, energy conservation, and recycling and waste management. Tourism and industry-driven workforce development efforts are spearheaded through this agency



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as well. The key initiatives for the agency in 2004 include the creation of 20 entrepreneurship centers, investment in existing companies and incumbent workers to promote technology adoption to ensure more competitive firms in the state, an expansion of the state's tourism promotion efforts, and a stronger linkage for job training programs targeted to those eligible for Workforce Investment Act assistance. In another example, Maryland has a traditional agency, the Department of Business and Economic Development, managed by a department secretary. It plays an active advocacy role for business as well as providing procurement assistance for small and disadvantaged businesses, assisting regions in their development efforts, and managing the state's tourism and film programs. For years, the Maryland Department's finance unit has been a national innovator in providing creative methods to foster capital formation and business lending. The state also has created a separate nonprofit corporation, the Technology Development Corporation, to foster innovation and commercialization within the state. In recent years, the agency has taken a more aggressive tact in fostering regional development, especially in the lagging rural parts of the state. Somewhat uniquely, New Jersey's Department of Commerce and Economic Growth operates as a cabinet agency with leadership and expertise drawn from across the state's agencies, including a board structure that includes the state commissioners of Environmental Protection, labor, transportation, and higher education as well as the secretary (or director) for the agency. The agency serves as an advocacy unit for business and offers services aimed at attracting and retaining businesses to the state. Unfortunately, the agency has also encountered significant turmoil of during the past several months with the resignation of the state's Commerce Secretary and several senior managers as well as the arrest of the agency's controller for alleged financial improprieties.



Linking Workforce and Economic Development

Integrating workforce and economic development has become a mantra of many state and federal officials. Minnesota recently merged its employment security and workforce development efforts with the state's economic development activities. Interestingly, Minnesota as well as Michigan, and Maryland, previously operated merged workforce and economic development agencies during the late 1980s and early 1990s. In each case, the agencies divorced again after a few years. The ultimate challenge facing many of these mergers is the differences in cultures between the two policy domains as well as the differences in the respective missions. Last year, Minnesota decided to try the experiment again because state policy makers believe that the federal Workforce Investment Act (WIA) legislation is now much more conducive to economic and workforce development collaboration. The agency's 200 economic development employees represent about 10 percent of the 1,900 staff employed in the new Minnesota Employment and Economic Development agency. In addition to the challenges of merging programs, senior managers have learned that the two agencies had completely different cultures about revealing information to the public about their activities. While both agencies have a tradition of protecting the privacy of their clients, the old Employment Security Department was driven by federal funding priorities and the need to protect individual privacy. The federal funding makes the workforce agency more driven to respond to federal priorities rather than those of the state legislature. In contrast, the agency's economic development counterparts are largely dependent on state funding and more likely to receive demands from the state legislature to defend the agency's performance and investment decisions. Today, challenges abound in bringing these two agencies with ostensibly compatible missions together to meet the needs of business and worker customers. Part of the challenge facing Minnesota's Commissioner (who previously served as Commissioner for the Employment Security agency) is balancing the increased demands (and inevitable time trade-offs) resulting from state legislative and other stakeholder interest in economic development programs with the federal focus on a much larger workforce development agency. This is especially problematic where federal performance requirements differ markedly from the state's policy priorities. In most states, the workforce development function is separated from economic



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development because of the recognition of these conflicts. Federal investments in workforce development, particularly at the state level, can dwarf the federal resources available for economic development activities. Even in Arizona, large amounts of federal dollars supporting workforce development programs may not necessarily translate into initiatives that are relevant to the state or provide sufficient resources to meet local needs.10



Taking a Narrow Approach to Economic Development

On the other extreme from agencies such as Minnesota is the minimalist approach to economic development exhibited by New Hampshire and New Mexico. New Hampshire has the smallest agency of the competitor states with only 16 employees involved in economic development. Additional employees work for the tourism office. The development agency and the state's travel and tourism office both operate as divisions of the state's Department of Resource and Economic Development (DRED). DRED manages the state's forests, parks, and recreation activities as well as the state's capital planning and architectural and engineering activities. The economic development office concentrates on international trade, support for businesses seeking licenses or permits, and providing community and workforce development services to localities in the state. New Mexico's economic development efforts also include a relatively small group separate from its tourism promotion efforts. The economic development office is responsible for the state's business recruitment and retention activities and border relations (including a "Border Authority" focused on improving development near the Mexican border as well as a Mexican Affairs and Trade office). An important part of the state's strategy is an effort to build on the significant federal lab presence through the efforts of its Space Commercialization as well as its Science and Technology offices. The state has also made a substantial investment in attracting film production. New Mexico appears to have made significant strides in building a national reputation in this regard, as exemplified by a 2004 article in the Cond� Nast young men's magazine, Details, focused on New Mexico as the "hot" alternative to Canada or southern California as a film production locale. New Mexico's economic development program is small, but it appears to be focused on a few areas in which the state feels that it has a competitive advantage � space and related sciences, film promotion, and Mexico trade. The state has also set aside $200 million from the Severance Permanent Fund (generated from taxes on resource extraction activities) to invest in a group of venture capital firms that have promised to foster New Mexico firms. For a state in which the economic development agency receives minimal investment, these efforts appear to concede other aspects of economic development opportunities to its rival states while focusing the agency's limited resources on entrepreneurship, innovation, and Mexico trade. Other states have focused efforts, but their activities are geared toward a different, and perhaps more traditional, approach to economic development. Several states such as Georgia and Virginia opted to limit their economic development agency to traditional business recruitment activities. Other agencies are responsible for community development and existing industry programs. For instance, the commerce cabinet official in Virginia oversees a secretariat of agencies including the Virginia Economic Development Partnership (in which Partnership employees are not state employees) to implement business development programs while another agency, the Department of Business Assistance, oversees existing industry activities. The most extreme example of the downsizing of an agency is in California. Until 2004, California had a traditional line agency, but the state's severe budget crunch victimized the Technology, Trade, and Commerce Agency. The state dismantled the agency and reassigned small remnants of programs to the multi-faceted Business, Transportation, and Housing Agency and privatized other parts of the agency to the California Infrastructure Bank (I-Bank). Since this is a recent development, no information exists as to whether "unilateral disarmament" (as one might describe the California situation) has an impact on the economic well-being of the state.

10



Nancy Welch, David Berman et al, "Can't Stand Still: Issues and Ideas for Workforce Governance in Arizona," Arizona State University, Morrison Institute for Public Policy, 2004. -9-



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"Privatization" of Economic Development

As part of its efforts to reduce the amount of investment in the state's Commerce agency, a couple of states have experimented with "privatizing" the economic development function. The most high profile example is Enterprise Florida, Inc., created in 1992. Enterprise Florida is essentially an effort to contract out the state's economic development activities. After abolishing the state Department of Commerce in 1996, Florida opted to provide a multi-million grant to the nonprofit Enterprise Florida to operate international trade, marketing, and other business assistance programs. Tourism and technology programs are operated independently. Workforce programs are operated through a separate line agency, the Agency for Workforce Innovation. Florida has not been the only state to explore "privatization" of economic development activities. While not a competitor states identified for this study, Michigan's experience in privatization provides additional insights. The state created the Michigan Economic Development Corporation (EDC) in 1999 to oversee economic development. Part of the rationale for privatizing the state's economic development agency was to bring continuity and professionalism to the senior management of the state economic development functions as well as to leverage private sector investment in the state's economic development efforts. In both the Michigan and Florida cases, the private sector has been active, but it has not been a major boon to the organization's finances. The bulk of the funding for these agencies continues to be taxpayer dollars. The private sector historically contributed approximately $1 million per year to each of the two organizations. The funds are used to help the organizations support activities that would not be possible with state funds. Enterprise Florida passed the first true litmus test � the change of governors from one political party to another. The effort began with a goal of leveraging significant private investment in the state's economic development efforts. Enterprise Florida has succeeded in attracting approximately 10 percent of its revenues from private resources, but it is very sensitive to the concerns of local development agencies that also seek to attract corporate investment. The organization receives about $11 million in state appropriations and an additional 10 percent in private contributions. The senior staff of Enterprise Florida need not be state employees, and the CEO is subject to the Board's hiring and firing decisions. The Governor serves as chair of the Board, maintaining executive branch oversight of the state's economic development function. The jury is still out about the long-term prospects for the Michigan EDC. While MEDC has survived a change of political parties, there have been some significant changes. After the new governor hired her own director (a career economic development professional), she then reorganized the economic development function, merging it with workforce development activities into a newly formed Department of Labor and Economic Growth. The Michigan EDC director now reports to the Secretary of the new department. Thus, the newly reorganized MEDC operates much more like the Virginia Economic Development Partnership with perhaps a broader portfolio of activities to manage. Unlike the line staff of the EDC, senior EDC staff members are not state employees, serving at the pleasure of the director. While it is not completely privatized, Massachusetts has opted to spin off much of the implementation of its economic development to outside entities. Massachusetts provides a unique example because it has a small line agency, the Massachusetts Department of Business and Technology that is supplement by state-chartered quasi-public agencies. These agencies oversee the implementation of business finance, technology, workforce, and other programs.



Economic Development as a "Developer"

New York, another of the competitor states, has a model that builds on the experience of Massachusetts' quasi-public agencies and the long tradition of New York localities getting directly involved in real estate transactions. The State has a traditional Department of Economic Development line agency, but that agency accounts for only a small portion of the state's economic development efforts. The Commissioner serves as a governor's cabinet official, and he has held that job during the full 10 years of Governor Pataki's term of office to date�one of the longest running state economic development agency directors in the past generation. The



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agency is unique in that a small portion of the budget is appropriated through the state legislature. Most of the funding for economic development comes from revenues generated by development projects controlled by the Empire State Development Corporation (ESDC). The state's senior economic development team also serves in senior management roles for the Empire State Development Corporation (ESDC), a quasi-public entity that oversees a number of significant development projects completed across the state, including several large projects done in New York City. Nearly 80 percent of the agency's budget (over $200 million per year) is funded through the proceeds of ESDC-controlled real estate and business development projects, funding a significant part of the agency's operations as well as its continued involvement in housing and community development. Much of the resources for this effort came from the creation of the Urban Development Corporation, the predecessor agency to ESDC, in the late 1970s and its success during the 1980s and 1990s of building a strong portfolio of business and real estate loans. To some extent, New York's financing approach exemplifies � on a much grander scale � what Arizona might have envisioned with the Commerce Economic Development Fund when it was first created. The UDC and its successor ESDC were beneficiaries of an aggressive use of federal and state program investments � including the now-defunct Urban Development Action Grant and federal urban renewal programs. These investments made over time helped "endow" the state's economic development agency. Unfortunately, Arizona never created a large enough portfolio to generate sufficient revenue and, over the past several years, the legislature has appropriated much of the returns from past investments to the agency's basic economic development operations.



Endowing Economic Development

Other states have created "endowments" for their economic development or technology development agency, providing some protection against the whims of unpredictable revenue cycles and budgetary constraints. During the early 1990s, Alabama created a $14 million endowment for technology-based efforts using oil and gas revenues. Unfortunately, that endowment was "raided" in the late 1990s by universities starved for cash. Georgia and North Carolina have each created funds for rural development using proceeds from their tobacco settlement. Georgia created the "One Georgia Fund" that was originally managed by the state's Department of Industry, Trade, and Tourism and now by its Department of Community Affairs. The fund is designed to provide sizable grants for economic growth in rural areas. North Carolina placed a sizable portion of its tobacco settlement funds in the Golden Leaf Fund, which operates as a private independent nonprofit with headquarters outside the state capital. The board of that fund is appointed by the Governor, the Speaker of the House and the President Pro Tem of the Senate. While the Golden Leaf Fund is influenced by the state, it is not driven by North Carolina Department of Commerce policies.



Unit of the Governor's Office

Some economic development agencies are operated as units of the Governor's office. Texas and Colorado provide prime examples of this. The agencies are small and focused primarily on international trade and overseeing "mega-deal" projects. Texas has even established a mechanism, the $295 million Texas Enterprise Fund, to better position the state in responding to these large deal opportunities. Many other states have such funds in place or their legislators are considering them. The Texas Enterprise Fund is so large that it is difficult to ignore and simply represents the "next level" of a wave of states creating or increasing "mega-deal" incentive pots. In the past, these large projects often required the state legislature to make a special appropriation, sharpening the glare of the public spotlight on projects at times of sensitive negotiations, delaying the timing of those efforts, and creating significant uncertainty for the businesses. Governors, businesses, and economic developers uncomfortable operating in this environment have convinced legislators to



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set aside sizable amounts of state dollars � typically from general revenues � as discretionary funds for unusual economic development opportunities in the form of large scale projects. A number of states already have the funds, and the legislatures of several states are considering whether they need their own "deal closing" funds or whether their existing fund should be bigger.



Local and Regional Support for Economic Development

In states such as Texas, Colorado, Florida, Georgia, and Virginia, localities are expected to handle the day-to-day activities of delivering economic development services except in the case of larger projects requiring state involvement. Texas localities have a local option sales tax that provides fairly sizable amounts of tax revenue to support local economic development organizations. North Carolina and Illinois have allocated state economic development agency grants in support of regional partnerships located across the states. These partnerships handle these day-to-day functions for their localities � especially those in rural areas. In Texas, Colorado, Georgia, Virginia, and Florida, economic development efforts are operated completely separately from the state's community development functions. In these cases, community development is managed by a housing and community development agency, except in Colorado where the Department of Local Affairs manages the state's community development programs. In every case, the community development function has been well separated from economic development and has developed an entirely unique (and sometimes conflicting) culture than that developed in the development agency.



The "Commerce" Agency Model

Of the 18 competitor states, North Carolina, Washington, Utah and Oregon have the most similar structure to Arizona's Department of Commerce. In all of these cases, the states invest substantial resources in aid to local communities. Their community development units are fairly large, but these units are supplemented with efforts to integrate workforce and economic development. North Carolina has a small community development unit, relative to these other states, and that unit actually operates at a separate location from the "downtown Raleigh" Commerce agency. Because North Carolina has created and funds seven regional partnership organizations to manage the state's business recruitment activities, the Commerce agency focuses on providing Business Finance and International Trade support. The Commerce Secretary has also placed a great deal of emphasis on improving the quality of the state's policy analysis and business development support. In general, NC Commerce is expected to feed project leads to the regional partnerships and provide much of the "back office" support for these partnerships, including support of economic development information services, and community "product development." The agency manages the state's business-driven workforce programs (including Workforce Investment Act funding) and oversees the state's tourism development activities. According to one legislative staff member, Washington's Community Trade and Economic Development agency historically was as a "dumping ground" for programs or initiatives when the legislature was unsure of where it should go within the agency. Not surprisingly, the state frequently reevaluates the state's economic development functions and the relationship between community and economic development. As a consequence, there have been significant efforts in the past several years to split the Community Development functions from the Trade and Economic Development office. While a complete separation of the functions was not achieved, an amicable arrangement was reached within the agency so that the director could focus more of her attention on Trade and Economic Development issues while the community development function operated semi-autonomously. A new director appointed in the past few months was formerly the economic development director for a local community so it is anticipated in the shortterm that this arrangement might continue. Utah has been a much more stable example of the merger of community and economic development. The state's focus, in terms of economic development, has been largely on building its research and technology base. The agency has Science Advisory Council and operates a



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program to leverage industry support for university centers of excellence. The programs have emphasized the state's traditional leadership in the fields of agriculture and natural resources, information technology, biomedical and biotechnology, aerospace and advanced materials and processes. Oregon is also dominated by its community development function as local growth management and development issues have historically dominated the agency's attention. In the early 1990s, growth management, particularly in the Portland metro area, was the leading policy concern for the states' Economic and Community Development Department (OECDD). However, as the state's economy improved during the 1990s, policy attention switched to job creation and retention with a special emphasis on the state's lagging rural areas. As a consequence of these historical trends, OECDD has devoted substantial resources to support community development, planning, development of local industrial sites, and financing for infrastructure projects. In addition to its support for communities, the agency also offers programs to help firms site new locations, recruit and train works, obtain financing and other agency incentives, and access small business and international trade assistance. The agency's research function does not include policy development, but instead focuses primarily on providing economic and market research for and about firms interested in an Oregon location. Oregon's governor recently announced the GROW Oregon's Future Workforce Initiative aimed at enhancing the link between economic and workforce development efforts in the state. Through this effort, the state is creating regional workforce response teams and a web portal with business and worker information. The agency is tapping businesses and labor unions to provide incumbent worker training programs.



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Comparison of Economic Development Governance Structure

State economic development agencies are frequently instruments of government so they ultimately must be responsive to the Governor as the chief elected official. While some agencies have boards that serve in an advisory role, others have boards that serve as a governing body. Still other agencies have no board at all, depending on the governor's office and the state legislature to fulfill policy making and oversight functions. The Arizona Department of Commerce has a unique governance structure in that part of the agency's funding and incentive policy decisions are made by the leadership of the state agency while a portion of those decisions are delegated to the Commerce and Economic Development Commission (CEDC), chaired by the agency director. The CEDC serves as the state's economic policy and planning board, and it oversees a Fund with some discretionary resources. Specifically, the Arizona CEDC has three major responsibilities: (1) to develop the State's ten year economic strategy; (2) to assist the department in the coordination of the independent efforts of all state and local agencies involved in economic planning and economic development; and (3) to administer the lottery-financed CEDC Fund as a source of financial assistance for businesses locating or expanding within the state or other qualified project, including research project submitted by the Arizona board of regents or projects sponsored by the state, its political subdivisions, public or private universities, tribal governments or economic development agencies. In executing this mission, the CEDC has been granted broad financial authorities, including the ability to: 1. Accept gifts, grants or loans and enter into contracts or other transactions with any federal or state agency, municipality, private organization or other source. 2. Purchase, acquire or hold by grant, gift, devise, lease or otherwise real or personal property or interests in real or personal property. 3. Improve, employ or use any real or personal property or interests in any real or personal property purchased, acquired or held for purposes of this article. 4. Sell, convey, lease, exchange, transfer or otherwise dispose of any of its property or any interest in its property, wherever situated. 5. Authorize, issue, sell and retire bonds for the operation of the Commission (this authority has never been implemented because of the appropriation of the Fund's lottery revenues, the only source available for debt service and retirement). The combination of statutorily authorized responsibilities of fund allocation and flexible financial authorities allows the CEDC to play a critical role in implementing portions of the state's economic development plan and policy. To determine how other competitor states structure their commissions or boards and assess their respective roles, the research team identified ten states among the 18 competitors that have an economic development commission or board serving the foremost state economic development agency. The ten states and their respective commissions or boards include: � � � � � � � � � Colorado � Colorado Economic Development Commission; Florida � the Board of Directors of Enterprise Florida, Inc.; Maryland � Maryland Economic Development Commission; Massachusetts � Massachusetts Economic Assistance Coordinating Council; New Jersey � the Board of Directors of New Jersey Commerce and Economic Growth Commission; New York � New York Empire State Development Corporation Board of Directors; North Carolina � North Carolina Economic Development Board; Oregon � Oregon Economic Development Commission; Utah � Utah Board of the Division of Business and Economic Development; and



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� Washington � Washington Economic Development Commission. ACCRA researched the history of the boards and conducted phone interviews with representatives in each state to determine how the commissions or boards operated. We were particularly interested in learning whether any of the ten state commissions or boards was authorized to control and allocate state funding for business development. The following section compares the purpose of each Board/Commission, its role in governance, the makeup and selection of each Board/Commission, the staff support available, and the operation of the Board/Commission.



Purpose of the Board or Commission

For most states, the purpose of creating an economic development board/commission is to bring political and business leaders together to promote and encourage economic development for the state. Such a board/commission is normally created within the state economic development agency by legislative statute. However, depending on economic conditions and the business needs facing each state, the mission or goals of each board and commission can vary significantly from state to state. Some state economic development boards/commissions are given the responsibility to develop and set economic development policy for the state, while others may be limited in their scope and their responsibilities to providing advice and counsel regarding the economic development agency's programs and activities. In Arizona, the CEDC was created as a governing body for the Commerce Economic Development Fund. It is authorized by statute to allocate financial resources in order to help businesses sustain, expand or relocate to Arizona. The CEDC has certain policy advisory functions, including the requirement to develop comprehensive long-range strategic economic plans for the state. Comparing the ten selected competitor states with Arizona, CEDC's dual purpose of managing a specific business attraction fund as well as setting development blueprints for the state appears to be quite unique. In general, most states established their economic development boards/ commissions to provide oversight to the state economic development agency's programs and strategies as well as to make policy recommendations to the agency or the Governor. Rarely do they have any fiduciary responsibilities. Their recommendations are advisory in nature. In general, one could categorize the economic development boards/commissions in Florida, Maryland, New Jersey, New York, North Carolina, Oregon, and Washington in this way. However, other states created their economic development boards/commissions with specific programmatic responsibilities in mind. We discovered that, as is the case with the CEDC fund, Colorado, Oregon and Utah have authorized their economic development boards/commissions to oversee a particular fund, often created to promote business attraction. For instance, the Colorado Economic Development Commission (EDC) manages the Colorado Economic Development Fund, which is appropriated from the state general fund to help sustain and create quality jobs for the state. Colorado's EDC is limited to framing policy decisions for the Governor's Office of Economic Development and International Trade while Oregon's EDC is responsible for developing the state's long-range strategic economic development plans. The Oregon Economic Development Commission (EDC) oversees the Oregon Economic Development Fund, financed by Oregon lottery proceeds, to provide funding opportunities for business and community development. This role makes the Oregon EDC similar in structure and philosophy to the Arizona CEDC. However, the Oregon legislature has directed a substantially larger proportion of lottery funds to the state's economic development agency's budget than has Arizona. Furthermore, the Oregon board has a more recognized role in the agency's planning and oversight. As for the Utah Board of the Division of Business and Economic Development (DBED Board), one of its main responsibilities is to administer the state's $21 million Industrial Assistance Fund (IAF), a job-creation incentive fund established in 1992 from the state general fund. The IAF is available to companies who relocate to Utah and/or to existing Utah companies expanding their operations within the state. The IAF provides grants to companies creating jobs that pay more than prevailing wages within a locality. Proceeds may be used for any purpose as long as the firm meets job and wage commitments. DBED Board duties are to approve funding for the IAF



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projects and provide policy advice to the Division of Business and Economic Development, a unit of the state's Department of Community and Economic Development (Utah DCED). Similarly, the Massachusetts Economic Assistance Coordinating Council is responsible for administering a specific program � the state's Economic Development Incentive Program (EDIP). Its responsibilities are strictly limited to issues related to the EDIP. The EDIP allocates the authority to localities to use tax increment financing and investment tax credits to projects that the Council certifies. Both the Utah DBED Board and the Massachusetts Economic Assistance Coordinating Council were created to oversee specific programs and not to provide general policy guidance to the state's overall strategic economic development plan.



Role in Governance

The mission and purpose of each state economic development Board/Commission is reflected in how they are structured and their role in governance. The Arizona CEDC plays a direct governing role in important aspects of the Commerce agency's activities. The CEDC is actively involved in the state's economic development efforts through its coordination of the state plan and allocation of funds for businesses, local and regional governments and organizations. In examining the role that other boards and commissions play, we have identified three basic roles: (1) Governing Board; (2) Program Oversight and Management Board; and (3) Advisory Board. Governing boards have an oversight role for the entire economic development function of the state (or at least the entire economic development agency). These boards tend to have a direct involvement in planning and review the agency's budget before it is submitted to the Governor or legislature. Program oversight and management boards tend to have fiduciary responsibilities over limited aspects of the agency. They may or may not be involved in the agency's strategic direction, but they oversee the direction of certain programs. Finally, Advisory boards provide business and technical expertise to the agency's staff. They may review policies and recommend priorities, but ultimately it is the agency director who is responsible for develop the organization's policy direction. CEDC is unique because it is principally an amalgamation of these three types of boards. It has some governing and fiduciary roles, but they are limited to specific programs. It also has direct involvement in selecting the strategic priorities that will shape the state's future economic development direction; however, they have limited responsibility for overseeing the implementation of those strategies. Compared with the CEDC, we found that several state economic development boards/commissions (i.e., CO, OR, UT, MA) perform similar functions as the CEDC in that they review and approve funding decisions for certain financial incentives or economic investment projects. Some boards, (e.g., FL and NJ) have greater responsibility in overseeing the agency's direction. The boards in Florida and New Jersey, in fact, have the authority to approve the agency's overall budget. Some of the boards/commissions in other states (i.e., MD and WA) are structured to serve primarily in an advisory capacity. They make policy recommendations to the state economic development agency and the Governor without direct involvement at the program level. A summary of duties and responsibilities for each state's board/commission is shown as below: Agency Governing Board Oregon Economic Development Commission � � � Develop and maintain an economic development policy for the state Oversee the Oregon Economic & Community Development Department and provide economic development policy direction for the agency Approve bond financing of economic development projects and making loans Enterprise Florida, Inc. Board of Directors



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� � �



Establish, implement, and manage policies, strategies and programs for Enterprise Florida, Inc. Maintain fiduciary responsibilities for Enterprise Florida � a not for profit corporation Develop a strategic plan for the state, in conjunction with other state and local and regional partners. New Jersey Commerce and Economic Growth Commission Board of Directors



� � �



Provide links to business community and resources for the Commission Provide access to key business leaders in the state Provide policy recommendations and decisions for the Commission New York Empire State Development Corporation Board of Directors



� �



Oversee the Empire State Development Corporation Create local subsidiary organizations to manage specific projects or economic development activities



Program Oversight and Management Board Colorado Economic Development Commission � � � � Develop and implement programs for the promotion of economic development in Colorado Approve loans and grants from the economic development fund to help existing businesses expand and new companies locate to Colorado Implement marketing programs to support ongoing business activities Make policy decisions concerning the state Enterprise Zone program Massachusetts Economic Assistance Coordinating Council � � Administer the Economic Development Incentive Program Designate Economic Target Areas, Economic Opportunities Areas, and Certified Projects � the three steps required to be certified to participate in the Economic Development Incentive Program Utah Board of Business and Economic Development � � � Promote and encourage business development, attraction and retention. Advise the Division on business development, attraction, retention and expansion efforts within the state Administer any money or program for business assistance, retention or recruitment



Advisory Board Maryland Economic Development Commission Develop and update a statewide strategic plan for economic development Establish economic development policy and oversee the Department's efforts to attract and retain businesses and jobs Recommend to the Governor program and spending priorities necessary to implement the strategic plan Advise the Department Secretary on regulations for financing programs and on the allocation of financial incentives



� � � �



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�



Raise funds from the private sector to supplement economic development programs and financial incentives to business North Carolina Economic Development Board Provide economic and community planning for the state Make budget appropriation recommendations for economic development programs to the Governor Make policy recommendations to the Commerce Secretary, the General Assembly, and the Governor Washington Economic Development Commission



� � �



� �



Develop and update the state's economic development strategy and performance measures



Provide advice to and oversight of the Department of Community, Trade and Economic Development Because it does not oversee the entire agency, we have categorized the Arizona CEDC using this typology as a "Program Oversight and Management Board." It has a limited fiduciary role somewhat similar to the governing boards of Florida and New Jersey, but it does not have responsibility for many aspects of the agency. In this way, it is very much like the Utah DBED board. It is different in its involvement with framing the agency's strategy planning efforts, similar in form to Oregon. This involvement provides an opportunity for the CEDC to influence the broader agency functions. This dual role suggests that the CEDC has an opportunity to expand its role. The true strength of the CEDC depends on the willingness of the governor and the agency's leadership to depend on the CEDC advice and utilize it in shaping the state's broader strategic economic development direction and budget priorities.



Makeup and Selection of Board or Commission

As Table 3 illustrates, the CEDC consists of nine members; the agency director and eight others appointed by the Governor and confirmed by the Senate. The Commerce director also serves as the board chairman. Each appointed member serves three-year terms, and their professional backgrounds must be in the areas of finance, international trade, business management, environment, economics, or economic development. With a relatively small number of members, the commissioners work closely with the agency staff to offer their technical guidance to the state agency. Furthermore, because of the small size, it is critical that the Commerce director agree with the perspectives and opinions of the Commission members. Other states, including Oregon, Colorado and Utah, also have a relatively small number of board/commission members involved in making funding and policy decisions for the agency. For example, Colorado's EDC has nine members, five of them are appointed by the Governor, two by the President of the Senate, and two by the Speaker of the House. Each member serves at the pleasure of the Governor with no fixed term. No legislative members are allowed to be on the Colorado EDC. The economic development director is also appointed by the Governor as one of the EDC's voting members. Oregon's EDC consists of only five members appointed by the Governor and confirmed by the Senate. The Oregon's commissioners serve staggered four-year terms. The Oregon EDC members represent different regions of the state. No single political party may dominate the board, and at least one of the commission members must have substantial experience in international trade. The agency director is not a member of the EDC. Instead, he or she serves as the primary staff person to the EDC. Utah's Board of Business and Economic Development consists of 15 members appointed by the Governor to staggered four-year terms of office. Their appointment requires the consent of the Senate. The Governor selects the chair, and board members are typically limited to a total of eight years service. The agency director is not a member of the board. The Board created five



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subcommittees to address specific policy needs and priorities, including an Incentives Committee, Business Development Committee, Best Practices Committee, Legislative Issues Committee, and University Centers of Excellence Committee. Enterprise Florida is actually a non-profit organization that receives an annual renewable contract from the Governor's office to operate the state's economic development activities. The Enterprise Florida Board is a governing board in its purest sense. The 58-member board includes a number of funding partners as well as the 30 statutorily required seats. The board oversees the nonprofit's activities and approves its annual budget. The Governor serves as chair of the board with the Vice Chair representing the private sector. The Governor's office also retains significant control of the organization's funding as the Governor's economic adviser serves as the primary contract administrator for Enterprise Florida. Those states with Policy Advisory Boards appear to have structured their boards quite differently from the CEDC. The common features among the boards in North Carolina and New Jersey are that they tend to have (1) a larger number of people serving on the board, (2) the chair is explicitly named by the Governor or the Governor himself serves as the chairman, (3) representatives from different state agencies involved in the state's economic development efforts frequently serve as ex-officio members, (4) state lawmakers serve as voting or non-voting members on the board, and (5) the Boards have organized subcommittees to address various economic development issues and make recommendations on their designated policy area to their respective Board for final action. Maryland's EDC is somewhat different from the other advisory boards in that it is composed of 25 private sector members who serve in an advisory capacity to the agency. In 2002, the Washington Competitiveness Council, a 36-member blue ribbon panel recommended the creation of the Washington Economic Development Commission to serve a similar function for the Washington state Department of Community, Trade, and Economic Development (CTED). That state's legislature passed statutory language during the 2003 session establishing the 7-member EDC. While the goal of the Washington EDC was to provide policy oversight and direction, it has not yet gotten off the ground. Agency staff indicated that the EDC was being reorganized to serve as an advisory group beginning July 2004. Table 3: Makeup and Structure of Board or Commission State Size of the Board

9



Make up of the members

8 public members and the ED director



Member Selection Procedure



Role of ED director or Commerce Secretary

Serves as chairman



Terms of services

3 years



AZ



CO



9



FL



30



5 appointed by the Governor, 2 by the Senate and 2 by the House 18 government officials and 12 members from the private sector; The actual number is currently 58 because business people who invest more



Appointed by the Governor and confirmed by the Senate. Requires members to have experience in finance, international trade, business management, environment, economics or economic development Appointed by the Governor, the President of the Senate, or the Speaker of the House Of those 12 private sector members, 6 are appointed by the Governor, 3 are appointed by the President of Senate, and 3 are appointed by the Speaker of the House. All appointees are confirmed by the Senate. The private sector members should be diverse in race, ethnics, gender, and geographic distribution. Members should have experience in international business, with expertise in transportation, finance,



Serves as a voting member. Director of Local Affairs Department is also a member. The Governor is the Chair of the Board. President of Enterprise Florida is not a member, but serves as record keeper for the Board. Other public officers serve as members include the state's Chief Financial Officer, Education



At the pleasure of their appointing authority Appointed members serve for terms of 4 years



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Table 3: Makeup and Structure of Board or Commission State Size of the Board Make up of the members

than $50,000 in the Enterprise Florida, Inc. are eligible to sit on the Board. 4 government officials and 7 members from the private sector appointed by the Governor.



Member Selection Procedure



Role of ED director or Commerce Secretary

Commissioner, Workforce director, and the Secretary of the State. Two legislative members are ex officio. The director of ED Dept and the director of Housing and Community Development Dept serve as co-chairperson. Other public officers include the director of Labor and Workforce Dev. and the president of the Commonwealth Corporation. The Secretary serves as a nonvoting ex officio member. The Governor designates a chairman from the voting members. The Secretary of Commerce serves as ex officio and as the secretary of the board.



Terms of services



law, and manufacturing.



MA



11



7 appointed members should be selected from different regions of the state. Members must have expertise in training, business relocation, and innercity and rural development or they must be knowledgeable in public policy and international and state industrial trends.



Serve at the pleasure of the Governor



MD



25



25 members from the private sector and ED organizations 14 members from government and the education system, and 23 from the private sector and ED organizations.



All members are appointed by the Governor with consideration given to geographic and industry representation.



3 years



NC



37



NJ



13



6 ex officio members, 5 public members appointed by the Governor, and 2 non-voting legislators



14 public sector members include the Secretary of Commerce and Revenue (both are ex officio members), 8 state legislators, the President of the University of NC, the President of the NC Community College system, the Secretary of State, and the President of the Senate. Of the remaining 23 members, 1 should come from an ED non-profit organization and two from county ED groups. All of them should reflect the ethnic and gender diversity of the state. The Governor designates a chair and a vice-chair. Of 5 public members, 3 members must have appropriate geographic representation from throughout the State, and should not all from the same political party. The remaining 2 members should be recommended by the Senate and the General Assembly respectively.



Appointed members serve for a staggered term of 4 years



NY



9



OR



5



7 public members and 2 ex-officio members 5 members from the private sector



7 public members are appointed by the Governor with the consent of the Senate. Members are appointed by the Governor and confirmed by the Senate with consideration given to geographic representation. Not more than 3 members may belong to one political party. At least one member should have substantial experience in international trade. All members are appointed by the Governor with the consent of the



The Secretary of Commerce Commission is one of the members. The Governor serves as the chair. Other ex officio members include the Commissioner of Environmental Protection, Labor, Transportation, and Higher Education. The Commissioner of Economic Development serves as the chairman of the board. The ED director is not a member.



3 public voting members serve a five year term. 2 remaining voting members appointed by the Governor serve at the pleasure of the Governor N/A



4 years



TX



9



9 public members



The director Texas Economic Development



Serve a staggered term



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Table 3: Makeup and Structure of Board or Commission State Size of the Board Make up of the members

appointed by the Governor



Member Selection Procedure



Role of ED director or Commerce Secretary

is not a board member.



Terms of services

of 6 years.



UT



15



15 public members



WA



7-9



At least 7 and no more than 9 members appointed by the Governor



Senate. Members should represent different geographical regions of the state. One member should be the resident of the county with a population of less than 30,000. All members are appointed by the Governor with the consent of the Senate. Should not serve more than two full consecutive terms except for the best interest of the state. The Governor selects a chair. Appointed members should provide geographic and ethnic representation. A minimum of 75% of the members should represent the private sectors.



The director of the Business and ED is not a member.



Serve for a staggered term of 4 years



The ED director is not a member.



3 years



Staffing for the Board/Commission

The Arizona CEDC has two staff members, one is the executive director for the Commission and the other staff person serves as its portfolio manager. The staff members provide administrative support for the commissioners and manage projects funded through the CEDC fund. The CEDC also accesses other Commerce Department employees to provide research support and technical assistance. For instance, Commerce business attraction and service division staff helps in closing deals for the CEDC projects. Like Arizona, some states, including Colorado, Maryland, and North Carolina, have designated development agency employees to staff the commission or board. In Colorado, the commission has three staff, one executive director and two other staff persons charged with program management and administrative work, including the production of annual report and marketing activities. In Maryland, the Department of Business and Economic Development assigns two staff to provide administrative support to the Commission. These staff persons also serve as liaisons for the Commission to coordinate with other state agencies and commissions on related economic development issues. The Commerce agency in North Carolina has dedicated two parttime staff to support the board, including organizing board meetings, managing the website, conducting research, and writing reports. In the other states, the Commission does not have dedicated staff, but the agency provides staff support. In Florida, the president of Enterprise Florida is the statutorily designated staff person for the board. He or she serves as record keeper for the Board. However, as the process of developing strategic plans for the state continues, the board found an urgent need for employing its own staff to provide assistance in managing board activities and related communications. Currently, the organization is in the process of creating a director position for the board. For those boards/commissions that do not have their own staff, most of their research and administrative work rely on various agency staff members as needed. The state agency normally assigns a staff to serve as a liaison to coordinate and manage various research and administrative needs within the department. This type of staff structure is illustrated in New Jersey, Oregon, and Washington. For those boards/commissions that are organized into subcommittees, the corresponding division staff from within the agency provides staff support to the board.



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The Operations of the Board

Most of the boards or commissions are mandated to meet at least four times a year, or as often as there duties require. The exceptions to this practice are the Arizona CEDC and Utah Board of the Division Business and Economic Development. The CEDC meets every other month, and the Utah Board meets monthly. For the Arizona CEDC and the Utah DBED board, frequent meetings are deemed necessary because they are responsible for reviewing financial assistance applications. In North Carolina, the full board meets quarterly, but the board's Executive Committee meets monthly to plan the agenda for Board meetings and address issues which may arise between quarterly meetings. Most board meetings are held in formal public sessions, requiring notice to the general public in compliance with state "sunshine" laws. The lone exception to this rule is the Arizona CEDC, which can go into executive session in order to maintain the confidentiality of information provided by applicants. For some states the meeting location is typically held at the state agency (i.e., AZ, UT), while others tend to organize their board meetings in various locations around the state in order to encourage the participation and involvement of local community leaders (i.e., FL, NC, OR). All of the states indicated that board members receive no compensation but are entitled to reasonable travel and other expenses incurred in the performance of their duties. Most Commissions or Boards are required to produce an annual or biennial report to the Governor and the legislature. Project application and review process In addition to the Arizona CEDC, only three states (Colorado, Oregon, and Utah) authorize their economic development commission or board to have control over money for funding businesses or communities. The Massachusetts Economic Assistance Coordinating Council certifies communities as eligible to receive special tax rates or tax increment financing, but it does not actually have a budget or allocate resources to individual projects. It is instructive to compare how Arizona makes resource allocation decisions with the process used by other states. The CEDC has a specific process in evaluating the likelihood that proposed qualified projects will help to create jobs within the state through the retention, expansion or attraction of businesses or qualified projects. Those projects deemed most meritorious are funded. Applicants must deliver their proposals at least two weeks in advance of the monthly CEDC board meeting. In addition to posting business lending opportunities in the agency's website, some of the outreach activities include tapping the staff of the business attraction unit of the Commerce Department to disseminate the information about pertinent programs. As mandated in the statute, the staff must conduct a cost-benefit analysis on each application. The application must also be analyzed according to a set of criteria that include the estimated value of state and local tax returns, the number of jobs created/retained, wages, capital investment, and other economic benefits made as a direct or indirect result of such project. Based on the analysis, the Department's management team makes recommendations to the Commission regarding the amount and type of assistance, and then forwards the application and the Department's recommendations to the CEDC for final review and approval. Primarily due to financial constraints, the CEDC only funded 16 projects through the Arizona CEDC Fund in during the period 00-03, with ten projects funded in FY 04. The size of funding ranged from $22,000 (for a research study related to venture capital development) to $250,000 (to support implementation of the recommendations of the Governor's Council on Innovation and Technology). By comparison, the Colorado EDC has much greater flexibility in terms of the procedures of making financial assistance to businesses, local communities and economic development organizations. The Colorado Commission develops its own operating guidelines for financing projects. The general guiding criteria include the amount of grants or loans, the number of jobs created, the quality and wage level of jobs created, the number of local residents being employed, the intent to contract with local residents and companies, and the public benefits expected to result from such investment.



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One difference is that the Colorado EDC requires matching funds from project applicants located outside the state's enterprise zones. The Colorado EDC provides grants or loans for local economic development projects while offering grants for business marketing or development projects. Colorado's EDC makes investments in response to the state's overall economic development strategy, which historically identified rural Colorado as an important focus. Many of the Colorado EDC-funded projects were in rural communities in 2001 and 2002. In 2003, the agency changed its development strategy to focus on retaining and creating quality jobs, and as a result, many more of the projects funded were located in urban areas. The Colorado EDC funded more than 100 projects in last three years. Half of the projects funded were targeted to development activities in the state's Enterprise Zones. In 2003, the Colorado EDC invested nearly $2.5 million in 16 projects to support business attraction and expansion activities across the states. Almost every EDC applicant located outside an enterprise zone was required to provide a match of least 50 percent of the total project costs, and many exceeded that minimum match requirement. In fact, the EDC's $2.5 million investment leveraged $7.1 million in local investments, $1.2 million in private funding, and an additional $719,000 from the Colorado First customized training fund. In addition to these statewide activities, the EDC funded another $338,000 in projects targeted to for enterprise zones last year. The zones primarily used these grants for marketing purposes, and no funding match was required to leverage EDC investments for this purpose. In Oregon, applications are handled using one of two procedures. One approach taps the network of small business service providers in the state. Oregon shares information about and accepts applications for funding opportunities through these organizations. The second approach is used on an as-needed basis in which the agency's regional officers work with businesses and local communities and organizations to apply for financial assistance. The agency relies on its regional officers to help applicants identify which funding sources are appropriate for their financial needs. The selection criteria vary from program to program, and each has its own administrative rules and standard application formats. Projects are funded based on which appear to have the greatest likelihood to achieve minimum performance goals. The key performance measures used include job creation and/or retention, wages, export sales, and investment. The Oregon EDC adopted 27 performance measures in 2000, and since then the funding recipients have been required to make a quarterly report about their progress in achieving these measures. The Oregon EDC funded 339 projects last year, ranging from $9,000 (for consulting research) to $7.1 million (for an infrastructure project). The Oregon EDC's investments include projects in both rural and urban areas, infrastructure activities, sewer/water projects, business development (mostly small loans), industrial development bonds, and technical assistance grants. Nearly three-quarters (71%) of grants were directed to rural areas in 2002-2003. This exceeded the 65% target set by the agency. For instance, the community development and infrastructure programs are targeted to rural areas. The Utah Board of Business and Economic Development holds monthly meetings to review and approve applications for the Industrial Assistance Fund (IAF). Companies interested in applying for the IAF are asked to contact the agency's staff. The staff screens applications using a predetermined set of key criteria before the application is submitted for Board consideration. These criteria include the number of new jobs being created that pay higher than prevailing wages, the amount of capital investment in plant and equipment, and the purchases made from Utah vendors and taxable sales. The agency makes grant disbursements on a post-performance basis, meaning that the firm or project receives funding only after the promised jobs have been created and retained. If the new jobs indicated in the proposal do not exist after five years, companies may be required to pay back any investment that they have received or they may no longer be eligible to receive previously approved grant disbursements. In Utah, the incentive commitments from the Industrial Assistance Fund range from $40,000 in rural areas to $3.75 million in urban areas. This particular funding stream was established in 1992 by the state legislature with $10 million, and over the years the fund balance has grown to about



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$25 million. In 2003, the Board approved incentive commitments to 11 companies from the Utah Industrial Assistance Fund and tax increment rebate funding to two companies in Aerospace/Aviation Development Zones. The IAF actually consists of three basic programs. One of them is the Rural Utah Program, which has a focus on job creation in rural areas. The Fund's other two programs are aimed at encouraging corporate headquarters and investing in certain state-designated targeted industries. While the Massachusetts Economic Assistance Coordinating Council does not allocate resources per se, one key responsibility is to designate the economic target areas eligible to receive assistance. While certain areas are targeted, these are selected based on a combination of distress and opportunity, and they include both rural and urban regions. Delivering and monitoring assistance Among these strategic funds, most states have opted to make investments in traditional forms � via either grants or loans. Several states have equity participation programs, but none of these equity investment programs are actually managed by the state's commission or board. Most equity investment activities have been turned over to professional fund managers. In fact, the majority of strategic fund investments are offered in the form of grants because even lending programs require financial analysis and management expertise that few commissions or boards have readily available. At the same time, the lending programs that states do have in place are placed under the care of experts who have fiduciary responsibility for the fund. Quite often, states have created financing authorities with expertise in commercial lending to oversee loan funds. These lending programs do not qualify as strategic funds, but they are important to the economic development toolkit of many states. Whether the program offers grants or loans, several states have established clawback provisions for some or all of their programs to ensure that the benefiting firm delivers on the promised job creation and investment. Good Jobs First, a Washington, DC-based think tank focused on business incentive policy reform, tracks legislation that includes clawback provisions. Table 4 summarizes that organization's most recent findings on state clawback provisions.



Table 4: States with Clawback Provisions State Arizona California Connecticut Georgia Illinois Iowa Maine Maryland Michigan Minnesota Nebraska Program Eligibility for economic development assistance Economic Revitalization Manufacturing Property Tax All business incentives Business Expansion Tax Credit Community Investment Recovery Act Corporate Accountability For Tax Expenditures Act Good Neighbor Agreement New Jobs and Income Act Enterprise Zones Jobs and Investment Tax Credit Job Creation Tax Credit Property Tax Credit Economic Growth Tax Credit All subsidies Employment and Investment Growth Act Employment Expansion and Investment Incentive Act Statute 41-1505.07 Rev. & Tax Code Sec. 5108 32-5a-1 48-7-40.21 740 ILCS 30/5 20 ILCS 715/25 15A.4 15.330 15E.193 36-5215 83A-5:1102 9-230 208.37c 116J.994 77:4107 77: 27,188



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Table 4: States with Clawback Provisions State Nevada North Carolina Ohio Oklahoma South Carolina Vermont Virginia West Virginia Program Business Tax Abatement Job Development Investment Grant Corporate Franchise and State Income Tax Credits Investment Tax Credit Investment Tax Credit Economic Development Mortgage Loans Major Business Facility Job Tax Credit Business Investment and Jobs Expansion Tax Credit Statute 360.750 143B-437.59 122.17 68 Sec. 2357.28 12-14-60 10:12.264 58.1:439 11-13C-8a



Source: Good Jobs First, January 2004



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Budget Comparisons

ACCRA gathered data on 2004 state economic development budget allocations for Arizona and each of the 18 competitor states. Comparing these investments across states is challenging for a number reasons. States organize their economic development agencies and functions in a variety of ways. For instance, some states combine economic and community development activities, business regulatory and development functions, tourism, or economic and workforce development efforts into a single agency. Others separate some or all of these functions from economic development into separate housing and community, workforce, tourism, and business licensing agencies. To further complicate the issue, policy makers use a variety of relatively common terms to mean different policies. For some states, economic development is used as a synonym for business recruitment or attraction activities while others use this as a broader term referring to local investments in community facilities as well as direct assistance to firms. This effort aimed to examine the most common development related functions to create a combined economic development budget. A 1996 study11 of federal economic development policies found more than 450 programs, and economic development efforts in 50 states are likely to be just as complicated. Our analysis targeted the most significant investments made by 39 different agencies providing economic development programs in the 19 study states. In 2004, Arizona allocated $59.3 million for economic development and tourism activities according to data provided by the agency and the state legislature. Federal grants accounted for nearly $5.5 million of that amount so the state's investment in economic development and tourism programs totaled nearly $54 million. Of the $54 million state investment in economic development and tourism programs, Arizona Department of Commerce efforts accounted for $36.7 million, and almost all of the remainder was allocated to the state's tourism office. According to the state's Joint Legislative Budget Committee, Commerce received $3.6 million in General Revenue Funds, covering the basic operations of the agency, including personnel costs. Commerce also received $3.1 million through the Commerce Economic Development Commission and State Lottery Funds, $156,000 in oil overcharge dollars, and $120,000 in bond funding. The CEDC's lottery funds allocated to the Department of Commerce represented less than half of the total legislative appropriation for that fund as approximately $4 million was allocated to legislative appropriations. In addition, the agency received a $30 million allocation from the Job Training Fund, financed by the state's unemployment insurance program. The state's tourism program complements the Commerce Department's efforts, but operates from a separate agency. The tourism office received $9 million in General Revenue Funds and $7.5 million from the Tourism and Sports Authority as well as tribal gaming revenues. Arizona is not the only state in which special funds account for the majority of resources for economic development. Approximately 37 percent of Arizona's state economic development, job training fund, and tourism allocations are made from general fund dollars. This proportion is slightly lower than its competitor states. About 40 percent of other state investments are made from general funds. Certain states, including North Carolina and New Hampshire tap general revenues for 100 percent of their state's economic development funding. In contrast, Oregon and Texas allocate 1 percent or less of their economic development funding from general revenues. Oregon dedicated funding from the state's lottery to pay for economic development activities. The Texas budget is composed almost entirely of the $295 million biennial appropriation for the Texas Enterprise Fund, a "deal closing fund" created in September 2003 to invest in several major projects including $40 million for the nonprofit Sematech research consortium, $3.6 million for the Texas Energy Center in Houston, $50 million for a semiconductor research facility at the University of Texas at Dallas in collaboration with Texas Instruments, and $25 million for a

11



National Academy of Public Administration, "A Path to Smarter Economic Development: Reassessing the Federal Role," prepared for the US Economic Development Administration and the Annie E. Casey Foundation, November 1996. - 26 -



ACCRA/Center for Regional Economic Competitiveness



biomedical imaging research center at the University of Texas Health Sciences Center with General Electric Medical Services.12 Florida's Economic Development Transportation Fund, Georgia's Economic Development Growth and Expansion (EDGE) Fund, New York's Economic Development Fund, Utah's Industrial Assistance Fund all invest more than $10 million for grants and loans. New Mexico created a $220 million Invest New Mexico revolving fund in 2003 aimed at providing equity capital for New Mexico businesses. The NM fund taps the State's Severance Tax Permanent Fund to provide capital for co-investments in businesses. These investments are made primarily through 13 existing venture capital funds. Other states have similar programs (including Colorado's now defunct $41 million capital access company � CAPCO � program aimed at fostering seed and venture capital investment in companies within their borders). For 2005, the Florida legislature is considering a proposal to expand its $6 million "Quick Action Closing Fund" to $25 million. The North Carolina legislature is considering a $20 million "One North Carolina Fund," quadruple the amount of that program's historical funding level. New York already has increased its fund by half, from $40 million to $60 million in 2004. Other states also have special trust funds for economic development. Florida receives 60 percent of its state economic development funding from several dedicated trusts, including separate funds for economic development, tourism, international trade, economic development transportation, and brownfield remediation. In addition to the EDGE deal closing fund, Georgia created the One Georgia Fund from its tobacco settlement money to provide assistance to local communities in diversifying their economic base. Massachusetts taps its workforce training and tourism funds to support economic development. New Jersey and New York also have special tourism funds to support their promotion and advertising efforts. In addition, New Jersey created an economic development site fund. New Mexico generates revenues from its tourism promotion magazine to support that publication as well as other tourism-related activities. California, Utah and Virginia have infrastructure banks, using bond proceeds to support their economic development financing efforts. Washington State uses its housing trust fund to support community economic development activities. When compared with its competitor states, Arizona's efforts are similar in breadth, but are significantly smaller in the amount of economic development resources available.



The Federal Share of Economic Development Funding

In 2004, the 18 competitor states invested a total of $1.7 billion in state general fund or other state money for economic development purposes. This amount does not include federal funding, which is reported at an additional $1.5 billion for the study states. Arizona has a track record of under-capitalizing in the attraction of Federal funds.13 Arizona's competitor states were able to attract $8.97 per capita in economic development-related federal funding as compared with Arizona's $0.89.14 Nearly three-quarters of the federal funding consists of workforce and community development dollars. Both Virginia and Minnesota, for instance, report their entire Workforce Investment Act (WIA) federal grants as part of their agency budget. A substantial portion of WIA training funds is operated through the North Carolina Department of Commerce and the Illinois Department of Commerce and Economic Opportunities. For instance, the VA, MN, NC, and IL federal share of workforce dollars account for a combined $1.0 billion of the $1.5 The Texas Governor controls allocations out of the Enterprise Fund with the consent of the Lt. Governor and Speaker. The remainder of the agency, which is part of the Texas governor's office, is designed to support Texas cities and counties that are allowed to impose an optional 0.5 percent sales tax for economic development. These are among the publicly reported projects based on internal management documents provided by the Texas Office of the Governor. 13 Tom Rex, "Federal Funds Received in Arizona," prepared by the Arizona State University Center for Business Research for the Citizens Finance Review Commission, September 2003. 14 Note, as explained later in this report, several competitor states report large federal investments from Community Development Block Grants through the US Housing & Urban Development and US Department of Labor grants for workforce services and training, as well Community Services Block Grants. When these programs are excluded, the per capita federal budget for economic development declines to $0.44 per capita.

12



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billion of federal funding reported in the survey.15 Community development accounts for an additional $330 million of that $1.5 billion amount, dominated by Washington, Illinois, Virginia, and North Carolina. That leaves approximately $170 million to share across the 18 states for other federal economic development program activities. The most important of these include community services programs in Washington State, business finance programs operated through Georgia, Oregon, North Carolina, Arizona, and Colorado, and manufacturing extension services in Illinois. The US Department of Energy provides much of Arizona's $5.5 million federal funding in support of business grants to improve energy efficiency. Because programs such as the Us Department of Housing and Urban Development (HUD) Small Cities Community Development Block Grant are allocated to a variety of agencies, the difference in the amount of federal funding across agencies is difficult to compare directly. For instance, the Small Cities CDBG program is operated through North Carolina's Department of Commerce office of community development while the same program is operated by Arizona's housing agency. This difference in where the funds go definitely can influence how the funds are used since NC DOC uses a portion of its state CDBG funds as match for US Economic Developmen