Category Archives: Economic development

Virginia to Prepare “Robust” Response to Amazon Project

The latest news on the great Amazon elephant hunt comes from Virginia Business magazine.  Managing Editor Paula Squires quotes Stephen Moret, CEO of the Virginia Economic Development Partnership:

Virginia has a keen interest in the Amazon HQ2 opportunity. We are thoroughly reviewing the company’s RFP, which includes a formidable set of site-selection criteria appropriate for a company with Amazon’s scale and ambition. … VEDP is committed to working closely with Governor McAuliffe and Commerce and Trade Secretary [Todd] Haymore to prepare a robust response in concert with our economic development partners at the local, regional and state levels.

Update: The Chicago Tribune reports that more than 100 cities have indicated an interest in responding to Amazon’s RFP. (Hat tip: Rick Gechter.)

Be Careful What You Wish For, Loudoun

Aerial view of Loudoun County near Washington Dulles International Airport. Would Amazon’s HQ2 beget more of this?

Loudoun County is going for it. An ad hoc committee has come together in the hope of landing the economic development deal of the decade: HQ2, Amazon’s second headquarter complex. “We will be very aggressive in going after this,” said Buddy Rizer, director of Loudoun’s Department of Economic Development. “I truly believe that we’re a contender in this.”

The Loudoun Times-Mirror has the story here.

Let’s hope Loudoun does a better job of exploring the ramifications of a mega-project like Amazon than it did the costs and benefits associated with the Silver Line! (Talk about buyer’s remorse. Loudoun is joining the Washington Metro club just as the transit organization seeks to dun participating states and localities billions of dollars for decades of inept management. Loudoun’s fiscal commitment to heavy rail service is bigger than its boosters ever imagined.)

Amazon has said it is looking for a location within a 30-mile proximity to a city center, with direct access to highways and public transportation options, including bus routes, Metrorail and train, and within 45 minutes of an international airport. As I opined recently, Loudoun has as good a chance as anyone. The county has all the required assets, it’s part of a metro region with the most highly educated workforce in the country, and it has a demonstrated track record of working with Amazon’s cloud-services subsidiary.

But Amazon is seeking massive incentives (as in subsidies and tax breaks), which will suck out much of the tax benefit to any locality hosting the technology giant. There are a couple of key points to remember.

It’s one thing to subsidize a company that helps put the unemployed and under-employed back to work, and another to subsidize a company in a fully employed metropolitan economy. In June, unemployment for the Washington Metropolitan Statistical Area was 3.9%, according to the Bureau of Labor Statistics. That is generally considered full employment, allowing enough slack in the system for a normal movement of people between jobs. However, unemployment in Loudoun and neighboring Fairfax County was 3.2%, which verges on labor shortage. Another neighbor, Prince William County, had 3.5% unemployment.

Where, then, would Amazon find 50,000 workers? Many would commute from other Northern Virginia jurisdictions, overloading already overloaded highways. And many would move into the region from outside the Washington region. It’s not clear that Virginia’s system of taxation can build infrastructure and provide the government services associated with routine economic growth, and that’s when everyone is paying the taxes.

If the dominant employer is not paying taxes, or only a small share of them, then one of two things will happen. Either state/local government will be unable to keep up with the demand on schools, utilities, roads, highways and other infrastructure, or it will have to raise taxes on everyone else. If a company employs one or two thousand, that doesn’t create a regional hardship. If it employs 50,000, it can create a fiscal crisis for the host locality. If it employs 50,000 while perpetuating the sprawling and fiscally untenable land use patterns still embedded in Northern Virginia zoning codes and comprehensive plans, it can bankrupt the entire region.

I’m not saying that Loudoun and Virginia shouldn’t bid for Amazon. The company could cement Northern Virginia’s status as the IT capital of the East Coast and, as a bonus, diversify the regional economy away from the federal government. But state and county officials need to go in with eyes wide open, fully aware of not just the benefits of landing Amazon but the costs.

Building an Economy on Outdoor Tourism

Horseback riding in Southwest Virginia. Photo credit: Rewire.

As Southwest Virginia struggles to adapt to the decline of the century-old coal industry, the region is taking a radical approach to economic development, reports Rewire. Writes the online Maryland publication: “Historically, natural resources in Appalachia have been mined, but southwest Virginia is trying to re-envision the hills, woods, and mountains of the state for outdoor tourism—and in the process, hold onto its younger residents.”

What is outdoor tourism? It covers the kind of activities one normally associates with the outdoors — hiking, biking, camping, fishing, kayaking, rock-climbing, horseback riding, and the like. But it also includes cultural assets such as the Crooked Road music trail and the Round the Mountain craft network.

No roller coasters or waterslide parks for Southwest Virginia. “We promote, preserve, and protect what’s unique to this region, so we haven’t invested in things that can be found in a variety of other locations,” says Jenna Wagner, marketing director of Friends of SWVA. “The Crooked Road, for example, is based on music that is specific to this region. We’re working to maintain that quality of [resources that are] really unique to the region that you can’t experience anywhere else.”

The initiative is yielding results — not transformative results, but perhaps something to build upon. Peter Hackbert, director of entrepreneurship for the public good at Berea College, has studied towns in Southwest Virginia such as Abingdon and Damascus (close to the coalfields but not in them). He interviewed 60 international travelers to the region from as far as Europe and Australia. “We saw people coming from out of state, enjoying themselves, and spending money.”

And the region seems to be doing a better job of hanging onto educated young people. According to the Friends of SWVA: “[T]he proportion of the SWVA population comprised of those 25-34 with a bachelor’s degree or higher was at 2.3% in 2000 and had increased to 3.04% by 2015. There is also a strong positive correlation between in the increase in travel expenditures and the rise in the young, educated population.”

Bacon’s bottom line: You can only make so much money and employ so many people off of bikers, back-backers and bluegrass concerts. The idea is to create amenities that people who live in Southwest Virginia can enjoy. Organizing fiddler concerts and developing access points along the Clinch River creates pride in community and provides recreational options that didn’t exist before. If such activities also help keep young people from moving out, that’s a big bonus. If out-of-town people decide to settle there, all the better. When the coal is all mined out, you build on what you’ve got — and Southwest Virginia has a distinctive, under-appreciated culture and a fantastic outdoors.

Corporations Tapping Virginia’s Under-Employed Labor Market

Hunter Willis, left, doubled his income by switching jobs from a call center to AvePoint in Richmond. Photo credit: Wall Street Journal.

A fascinating trend in the national job markets appears to be benefiting Virginia. A front-page Wall Street Journal article today is date-lined Richmond, Va.:

Pressed for workers, a New Jersey-based software company went hunting for a U.S. city with a surplus of talented employees stuck in dead-end jobs.

Brian Brown, chief operating officer at AvePoint, Inc., struck gold in Richmond. Despite the city’s low unemployment rate, the company had no trouble filling 70 jobs there, some at 20% below what it paid in New Jersey. New hires, meanwhile, got more interesting work and healthy raises.

As the unemployment rate approaches full employment, around 4%, companies are tapping the reservoir of under-employed — people working part-time, stringing together gig-economy work, or simply not fully utilizing the skills and capabilities they were trained for. It turns out there are a lot of those people in Virginia.

Here’s another example, which didn’t make it into the WSJ article: The Roanoke office of California-based PowerSchool will add 96 jobs and relocate to the former Norfolk Southern office building downtown.

PowerSchool’s expansion, announced Friday, will help offset the loss of more than 400 office jobs the railroad had eliminated in 2015, reports the Roanoke Times. The company expects the new jobs to pay an average annual salary of $68,116, 50% higher than today’s prevailing average wage in the city. The positions will include software development, customer service and administration and will filled during the next three years. 

Roanoke is shifting from being a “train city to a brain city,” said Roanoke Mayor Sherman Lea.

After years of sub-par economic growth since the 2008 recession, prosperity is finally trickling down from the millionaires and billionaires who benefited from booming stock and bond markets to everyday Americans. As the labor market tightens, corporations are still slow to raise general wages, but by tapping hidden corners of the economy they are creating better job opportunities for thousands.

The WSJ estimates the number of part-time workers who would prefer to work full time is about 5.3 million, or about 3.2% of the civilian workforce. That’s down from 6% at the depth of the recession but still high by historical standards.

AvePoint faced stiff competition for qualified workers in Jersey City, across the Hudson River from New York City, recounts the WSJ. Rather than increase worker pay in New Jersey, the company hired a site-selection consultant to review some 20 other locales. Richmond fit the bill. Although unemployment was only 4%, under-employment was pegged at 12%.

AvePoint pays its Richmond workers about 20% less than its New Jersey employees, but CEO Brian Brown says its Richmond workers enjoy more buying power. Median housing prices in the city are 40% cheaper. Indeed, AvePoint’s experience in Richmond has been so positive that Brown is making the city his operational headquarters. The company plans to have 200 employees there by the end of 2018.

I’ll take steady, incremental growth generated by a lot of midsize employers like Avepoint over a transformational investment by Amazon any day.

Dreaming the Impossible Dream

Amazon headquarters in Seattle. Really, would you pay hundreds of millions in subsidies for architecture like this?

Amazon’s announcement of its intention to build a second headquarters complex somewhere in the United States, generating $5 billion in investment and up to 50,000 jobs, sparked some lively punditry around Virginia. Reactions varied widely.

Central Virginia would be an ideal location, opined the Richmond Times-Dispatch. The region meets the threshold population of one million, it has a stable, business-friendly environment, it has a strong university system and access to a major airport and mass transit, and it offers a strong logistical system.

The big drawback, suggested the editorial, is Virginia’s aversion to subsidies and tax breaks. Amazon has made clear its interest in incentives. “Fabulously rich companies shouldn’t get handouts from the taxpayers,” says the libertarian-leaning editorial page. But with a prize as big as Amazon, it conceded, “It’s highly unlikely that the state’s political leaders will let any laissez-faire principles stand in the way of a project that could transform an entire region.”

The Virginian-Pilot editorial writer didn’t have much use for Amazon. Noting that Virginia Beach Mayor Will Sessoms hopes to pitch the technology-intensive retailing giant, the Pilot figured that Hampton Roads faces an uphill climb. Sure, the region does have the requisite one million population, and it soon will have access to huge trans-Atlantic broadband links, but the Amazon announcement may be no more than a marketing ploy — “a plan to wring tax breaks out of cities and states stepping on each other for the chance to capture some of that Amazon magic.”

“While communities in Virginia — including Virginia Beach — should certainly try to lure the retail giant here, officials should be wary as well,” the Pilot concluded. “Bending over backward for this or any company carries risk that needs to be worth the reward.”

Then there is the starry-eyed Roanoke Times which, despite a regional population less than a third of the one-million minimum, proceeded to make the case that Amazon should think transformationally: “If you go to some conventional big city, that’s simply a case of the rich getting richer. There’s no glory in that. If you come to Roanoke, a promising city that sits on the edge of Appalachia, you are single-handedly changing the rules of the game.”

The editorial writer touted the region’s high quality of life, its creativity in making deals work, and its proximity to Virginia Tech and Liberty University. “Our region has more undergraduates per capita than Boston, San Francisco-Oakland, Raleigh-Durham, or Austin, Texas. ”

Sad to say, I don’t think Amazon is looking for glory in its new headquarters complex. It’s not looking to transform the world with its corporate real estate strategy. I have to agree with the Pilot on this: Amazon is looking to convert its name into hundreds of millions of dollars in subsidies and tax breaks. And who can blame the company, as long as there are local governments around the country willing to sell their souls?

Landing a mega Amazon corporate center would be an economic game changer, it is true. The Times-Dispatch is right to relax its libertarian scruples enough to at least contemplate the idea of incentives.

But I have yet to see anyone conduct a rigorous cost-benefit analysis of a major economic development project. Studies invariably are framed in such a way as to bias the outcome in favor of the desired outcome. Thus, a study on the “economic impact” of an Amazon headquarters undoubtedly would show billions of dollars of positive impact — but would exclude the liabilities associated with providing government services not only to the Amazon corporate campus but to fund the growth in infrastructure and government services associated with 50,000 direct jobs and perhaps another 100,000 or more in “multiplier” jobs. Rarely will any consultant’s study reveal the net benefit — the benefit after costs have been deducted.

A region like Roanoke would be totally overwhelmed by the impact. Even Roanoke or Hampton Roads would be hard-pressed to accommodate such a surge in investment and jobs. Frankly, only Northern Virginia has the size, assets and wherewithal to play Amazon’s game. The rest of us need to dream more modest dreams and husband our resources for projects that (a) we realistically might win, and (b) we won’t regret it if we do.

Update: The New York Times crunches the numbers for Amazon, and narrows down the final four list to Portland, Denver, Washington and Boston. The optimum pick: Denver.

Amazon Sparks Competition for World’s Top Economic Development Trophy

Amazon has left an indelible mark upon rainy Seattle, where 24,000 of its employees work. These spheres, according to USA Today, provide “a warm, dry, plant-filled space for meetings, meals and mingling for up to 800 Amazon employees at a time.”

Amazon has announced its intention to build a second headquarters complex, the equal in size to its Seattle headquarters. And localities across North America — including some in the Washington region — are salivating over the prospect of winning what could be the biggest economic development trophy of all time.

The potential reward is stupendous. According to the Washington Business Journal, Amazon’s second corporate headquarters would bring 50,000 new full-time jobs with an average compensation of more than $100,000 over the next ten to 15 years. The company expects to invest $5 billion over the first 15 to 17 years of the project, which could require up to eight million square feet of commercial space.

Only handful of major metropolitan areas in North America have a prayer of competing for such a huge project because only a handful have a labor market big enough to accommodate such a massive demand for IT-savvy workers. Amazon has said it is focusing on metro areas with a population of more than one million.

With its highly educated, technically proficient workforce, the Washington region fits the bill in many ways. Perhaps giving Washington another edge is Amazon CEO Jeff Bezos’ familiarity with the region. He owns the Washington Post, he recently purchased the former Textile Museum property in the chi-chi Kalorama neighborhood for $23 million, and Amazon gave a D.C. nonprofit a $1 million match grant — its first outside of Seattle, notes the WBJ.

Moreover, Amazon Web Services (AWS) has a track record of doing business in Northern Virginia, which it has helped build into a world-class data-center hub. The cloud services subsidiary has developed strong relations with local governments, Loudoun County and Prince William County in particular, as well as local electric utilities, and the state of Virginia. AWS has worked out deals to supply its data centers with Virginia-located solar power.

Insofar as a company values the ability to get things done — and building a massive corporate center bigger than the Pentagon will require extensive zoning and regulatory permissions — and insofar as Amazon has had a positive experience in Virginia, I would expect the company to give the Old Dominion serious consideration.

You know that Governor Terry McAuliffe would give his right arm to close a deal of this magnitude — it would arguably be the greatest economic development coup in Virginia’s history. Amazon’s search and decision-making process undoubtedly will extend beyond McAuliffe’s term of office, but I cannot imagine the governor not making it his number one priority. He will have behind him much of the Virginia business establishment, desperate as it is to diversify the Northern Virginia economy from its perilous dependence upon the federal government.

Northern Virginia likely will be a strong contender for the investment, but it will face stiff competition from other major metros. Other bidders for the big prize undoubtedly will roll out billions of dollars in subsidies and tax breaks, which Virginia might be hard-pressed to compete against. Playing in this league will dwarf the resources currently available through the Commonwealth Opportunity Fund and other tools at the governor’s disposal.

We will know that Virginia is serious about competing for the Amazon headquarters if McAuliffe asks for special legislation from the General Assembly in January. Doling out billions in subsidies and tax breaks to benefit Bezos, one of the world’s richest men, should make for a rollicking good debate.

Thank You, GASB, for Bringing Tax-Break Transparency to Local Government

How to blow a hole in your tax base without really trying.

Every year, local governments across Virginia publish a voluminous document called a Comprehensive Annual Financial Report (CAFR) that describes their fiscal condition, detailing revenues, expenditures, debt, and growth in the tax base. This year, CAFRs should include a new data point: revenue foregone due to business tax incentives.

Few localities have bothered to compile and report this information before. But the Government Accounting Standards Board (GASB) issued a directive that requires state and local governments to disclose any taxes being abated, the dollar amount of the tax breaks, and any other commitments made by the government as part of a tax-abatement agreement. This “statement 77” goes into effect for financial statements beginning after Dec. 15, 2015. The data should begin surfacing in 2016 annual reports being submitted this year.

The accounting issue has become an issue because tax giveaways have become so ubiquitous. By one estimate, reports a Land Lines magazine article on GASB 77, state and local governments spent $45 billion in tax incentives in 2015, including $12 billion in property tax abatements. According to another estimate, total business incentives have tripled since 1990.

Many state and local governments have been addicted to tax incentives as a tool for recruiting businesses and capturing the tax revenue they generate. Here in Virginia, local governments reap real estate property taxes, machine & tool taxes, BPOL (business professional and occupational license) taxes, and a share of sales taxes paid by businesses in their borders. Many are willing to forego some of those tax revenues in order to capture a business and the balance of the revenue it will pay.  While Virginia localities haven’t gone to the extremes of some regions — the Land Lines article highlights the Kansas City metropolitan area and Franklin County, Ohio — tax exemptions are widespread.

For purposes of calculating a jurisdiction’s fiscal health, it is critical to get a handle on its real estate property tax base, which accounts for about 30% of all local revenue nationally. Local governments typically track the impact of non-profit and tax-exempt hospitals, universities and state facilities within their borders. Excessive reliance upon exemptions for corporate citizens also can hollow out a locality’s tax base, but that information is not readily available to citizens.

Few observers would advocate abolishing all tax incentives. Attracting a cornerstone facility such as an automobile assembly plant can generate tax revenues even after abatements, draw suppliers to an area, boost worker productivity, spark the creation of new training programs at local colleges and universities, and recruit top technical and managerial talent in a positive feedback loop. But all too often, incentives are handed out to everyone as businesses learn to play the game. A huge challenge for economic developers is gauging whether a business prospect is seriously considering relocating to other localities and needs the incentive as a tie-breaker or if it is just seeking to extract a subsidy for a decision it has already made.

Tax exemptions also raise equity issues. Why should newcomer companies get better tax treatment than businesses that have demonstrated a commitment to a community and paid taxes all along? From a social justice perspective, how much money is being diverted from priorities such as schools and infrastructure for all? From a free market perspective, could localities use the money to reduce tax rates for everyone?

People are less likely to ask those questions if they have no idea how much money local governments are leaving on the table. Transparency is good. GASB’s reporting requirement will make the information available in localities’ annual reports. Now it’s up to citizens to ferret out that information and make something of it.

What the Looming Higher-Ed Shakeout Means for Small College Towns

Sweet Briar College, affectionately known in my college days as “Sweets”

Two years after alumni rallied to save Sweet Briar College, raised millions of dollars and installed a new president, the small, liberal arts college north of Lynchburg still is in peril. The college admitted only 81 freshmen into its fall class — well below the 200 officials previously had estimated the institution needed to remain financially viable.

President Meredith Woo said spending came in significantly under budget last year, and the college can afford smaller class sizes. But the college is surviving on donor dollars, reports the Wall Street Journal.

Perhaps Sweet Briar will be able to reinvent itself as a smaller, niche institution. While few have come as close to the edge of disaster as Sweet Briar, dozens of other small liberal arts colleges are facing similar dilemmas.

According to the Journal, more than one-third of colleges with fewer than 3,000 full-time students had operating deficits in fiscal 2016, up from 20% in fiscal 2013. Likewise, finance chiefs of private, nonprofit colleges are increasingly pessimistic — only 51% indicated in a poll that their institutions will be financially or sustainable over the next five years, down from 65% the previous year.

Restructuring is rampant. Aquinas College in Nashville, Tenn., is dropping business and nursing programs, and eliminating residential living, to focus on training Catholic school teachers. Margrove College in Detroit is discontinuing undergraduate programs to concentrate on its graduate students. Wheelock University  in Boston has put its president’s house and a residence hall up for sale and has entered merger talks with Boston University.

Virginia has two dozen small, private, non-profit colleges, many located in small cities and towns. In many cases, they form the backbone of the local economy. As if rural/small town Virginia didn’t have enough other economic worries, non-metro Virginia could be experiencing the erosion of one of the few economic pillars it has left.

A handful of these institutions look rock solid — Washington & Lee University, the University of Richmond, and Liberty University have large and growing endowments, and have no trouble recruiting students. I don’t know enough about the others to draw any conclusions about their fiscal health, but it would behoove those interested in the well being of their communities to take a close look and make sure their local college isn’t about to become the next St. Paul’s College (now defunct) or Sweet Briar.

For readers’ edification, here are the private, non-profit schools in Virginia:

Appalachian School of Law — Grundy
Averett University — Danville
Bluefield College — Bluefield
Bridgewater College — Bridgewater
Christendom College — Front Royal
Eastern Mennonite University — Harrisonburg
Emory and Henry College — Damascus
Ferrum College — Ferrum
Hampden-Sydney College — Farmville
Hampton University — Hampton
Hollins University — Roanoke
Liberty University — Lynchburg
Lynchburg College — Lynchburg
Mary Baldwin University — Staunton
Marymount University — Arlington
Randolph-Macon College — Ashland
Randolph College — Lynchburg
Regent University — Virginia Beach
Roanoke College — Salem
Shenandoah University — Winchester
Sweet Briar College — Amherst
Union Presbyterian Seminary — Richmond
University of Richmond — Richmond
Virginia Union University — Richmond
Virginia Wesleyan University — Virginia Beach
Washington & Lee University — Lexington

Richmond’s Growth Bottleneck: Building Permits

Proposed 7west project.

Jeremy Connell wants to build a dozen high-end townhomes in Manchester, right across the James River from downtown. The $6 million, 7west project envisions four-bedroom, three-story townhouses priced in the $700,000s, providing a nice boost to the City of Richmond’s tax base and offering a short, easy commute to the region’s central business district.

He originally hoped to begin construction in April of 2016. Four months later, when demolition began, he revised the timetable to September. Yet today, 16 months later, work has not proceeded beyond the foundation-laying stage, reports Richmond BizSense.

The City of Richmond is experiencing an unprecedented boom as a wave of Millennials, empty nesters, and corporations move into downtown and surrounding neighborhoods. There is enormous pent-up demand to live and work in the amenity-rich city, with its walkable streets, historic buildings, museums and cultural institutions, and its canals and James River parks. But there’s a hitch. The city’s building inspectors can’t keep up. Writes BizSense:

“It is by far the worst it has ever been to get a project developed in the city of Richmond,” said Connell, who has been developing in the city for 15 years.

“The process is undermanaged, understaffed and overwhelmed,” Connell said. “It’s a bad three-way combination that retards development in the city.”

According to BizSense, Connell’s experience is frustratingly common. Doug Murrow, in charge of permits and inspections, attributes the delays to departures and vacancies that left the department temporarily short-staffed. Other observers quoted by BizSense (in a very well-sourced article, by the way) say the problems run deeper. The city has been slow to embrace new digital-permitting technology that would speed the process.

“The culture in Room 110 has been: this is the way we’ve always done it, this is the way we’re always going to do it,” says Charlie Diradour, a local landlord and developer. Diradour says that he hopes that the new mayor, Levar Stoney, will break the logjam.

For his part, Stoney says he is looking to neighboring Henrico County to see how the city might perform better. “We are suffering from staffing issues,” he told BizSense. “I wish we had the numbers that our friends in Henrico have: at least 70-plus people working on commercial and residential permitting. But we don’t have those numbers here. I know that the departments are doing everything they can to keep up with the uptick, but we can always do better.”

Bacon’s bottom line: In theory, core urban jurisdictions like Richmond should be kicking suburban butt in the race for development dollars. While Richmond clearly is rebounding, urban renovation is not occurring as rapidly as it could. In the past I have focused mainly on the zoning code as a throttling force. When Richmond could still annex country land a half century ago, it adopted a suburban zoning code that restricted denser, mixed-use development — precisely the kind of development the market wants to see. City Council has finally addressed that problem, especially in the Broad Street corridor (see “Richmond’s New Growth Corridor.”) But the city hasn’t fixed its permitting bottleneck.

In the competition for development, the City of Richmond enjoys immense advantages over its suburban neighbors, Henrico and Chesterfield Counties. But the counties do have one competitive edge — efficient government administration. The hassle factor is much lower. As Diradour told BizSense, contractors have told him that they add a point or two to their overhead when they do business in Richmond to account for the inevitable delays.

I don’t know if other cities have similar problems. BizSense suggests that the City of Roanoke has moved to a more efficient digital permitting process. Regardless, Richmond better get its act together, or it could squander a historic opportunity to rejuvenate itself.

Illuminating Rural Poverty in Virginia

Last week Augie Wallmeyer delivered a speech to the Virginia Historical Society on the “Extremes of Virginia.” If you haven’t read his book by the same title, listen to his speech. (Clicking on the image takes you to the Virginia Historical Society Facebook page, where the speech can be viewed.)