HD39 - Review of Economic Development in Virginia
Executive Summary: State involvement in economic development has increased over the last 15years with the recognition that economic development can yield financial returns for a state. However, economic development is still predominantly an activity of the private sector. The State's role is to serve as a catalyst for private investment through the stimulation and preparation activities necessary for the creation of material wealth for citizens, businesses, localities, and the State. Economic development initiatives are conducted by State entities and non-State organizations. It is estimated that these State and non-State organizations spent more than $769 million on economic development activities in FY 1989. This is an extremely conservative estimate of spending on economic development programs. However, it does include more than $396 million spent on transportation initiatives. During the 1988-1990 biennium, 72 State entities within six secretariats administered more than 230 economic development programs. These programs included community assistance, financial assistance, research and development, business assistance, tourism promotion, direct product promotion, export promotion, business attraction and regulatory. In FY 1989 these programs had total funding of more than $517 million, of which more than $298 million were State funds (Figure A). In addition,approximately$123 million were available from the State in industrial development bonds. While 87 of the programs were conducted within the Economic Development Secretariat, another 146 programs were conducted by agencies within four other secretariats. In addition to State programs, more than 500 non-State organizations were conducting their own economic development initiatives in the same year. These groups include a wide variety of public and private organizations which operate either on a local, regional or statewide basis. These organizations spent an additional $279 million on their economic development initiatives which included all of the categories offered by State agencies, except regulatory programs. The non-State organizations spent more than $193 million on financial assistance initiatives (which includes more than $182 million in industrial revenue bonds) and more than $22 million on tourism promotion activities (Figure B). While many State entities are involved in economic development initiatives, one State agency is dedicated solely to economic development. The Department of Economic Development(DED) has primary responsibility for the State's industrial development and tourism promotion activities. With the recent closing of the Department of World Trade, DED has been given the additional responsibility of the State's world trade efforts. Overall, Virginia has been relatively successful with its economic development efforts. However, since the State has been conducting economic development activities without a formalized comprehensive policy or policy process, the State has not been able to fully maximize its economic development efforts. Consequently, economic needs in many regions of the State are not being targeted by current State programs. Further, the State's fragmented approach to economic development has not integrated efforts to address many of the underlying conditions which affect economic development such as workforce quality. Moreover, given the large numbers of individuals involved, some programs appear to be duplicative. It is essential, therefore, that the Secretary of Economic Development exercise full authority in the policy area and ensure that Virginia has a formalized, comprehensive, written economic development policy. The recommendations in this report focus on improving Virginia's economic development efforts through a comprehensive policy and policymaking process. An in-depth assessment of 18 economic development programs -- 15 administered in DED's Tourism and Industrial Development divisions and three administered by other State entities -- reveals that the programs provide quality services to their clients. However, many of the programs have shortcomings which limit their effectiveness or preclude determination of economic impact. Additional recommendations are made which would result in better management of the Department of Economic Development. While recognizing that the services which the department currently provides are of high quality, the recommendations in this report focus on providing those same high-quality services but with a more efficient use of staff resources and State funds. This report summary briefly references study findings and recommendations. Detailed explanations are contained in the text of the report. Tourism Promotion Approach Needs Balance and Better Measures of Economic Impact The State's current approach to domestic advertising appears to be bringing tourists into the State. However, an accurate measure of the true economic impact of the State's domestic advertising program has not been made. Division reports of the "return on investment" from advertising are based on information which has methodological problems that inflate the program's impact. The division is using larger private attractions as the focus of its advertising efforts. However, additional activities are needed to promote Virginia's smaller, lesser-known attractions. Given the role that welcome centers provide in promoting these attractions and their estimated economic impact, efforts should be made to keep them open. Further, the division should increase the technical assistance available to smaller attractions and communities to better equip them to promote themselves for out-of-state and in-state visitation. The following recommendations are made: • DED should balance the brand name advertising approach with increased efforts to promote smaller attractions. The "See Virginia First" campaign initiated in Southwest Virginia should be expanded statewide. Because welcome centers provide a needed function in the State's tourism promotion, efforts should be made to keep them open. DED should develop a strategy for prioritizing which centers would be kept open. Alternative financing arrangements should be examined. • The Richmond sales office should be better utilized to promote intrastate visitation. The Richmond sales office and the welcome centers, if kept open, should incorporate the approach utilized by the Washington, D.C. sales office and promote a different geographic area of the State each month. Coverage should be given to each area of the State on a rotating basis. • The Division of Tourism should continue to assess the impact of its advertising on Virginia's economy, but the current formula and data should not be used. The division should modify its domestic advertising conversion study to include data items which will allow the division to accurately estimate the amount of revenue returned to the Commonwealth in State and local taxes. • The Division of Tourism should not purchase the economic impact information obtained from the U.S. Travel Data Center, nor should the division publish or distribute this information to localities. • DED should increase the level and types of community development assistance available from the Division of Tourism. Industrial Training Program Is An Important Marketing Tool, But Improvements Are Needed to Ensure Accountability The industrial training program is seen as an important tool to market Virginia to industrial prospects and provides skills training to Virginia's workforce. Industries reported high levels of satisfaction with the program. However, the program lacks clear eligibility criteria for determining which industries will receive training. This results in the program conducting repeat training for companies, training for companies which have gone into bankruptcy either during or immediately after training, and training for jobs paying at or near minimum wage. In addition, although some improvements have been made, the budget estimation procedures used by the program continue to be deficient. Finally, the current payback analysis used by the program overstates the impact of training on Virginia's economy. The pay-back analysis needs to be modified to use actual wage rates paid to the individuals trained in the program rather than average wage rates for industries in Virginia. The following recommendations are made: • DED should revise the eligibility criteria for its industrial training program. Training should be conducted only for companies that meet all three of the following criteria: 15 or more related jobs added, a minimum capital investment of $500,000, and starting wages of $6.50 or more per hour. Further, the department should establish a maximum dollar level for training assistance provided to any one company. • DED should limit the training projects conducted in anyone year to the amount of the department's originally approved budget for industrial training. The approved budget amount should be announced each year to economic development organizations. Training for unforeseen projects should be conducted only as funding permits. • DED should further refine its system for determining industrial training project budgets. • DED should modify the industrial training pay-back analysis to ensure that it yields an accurate picture of State benefits from the companies that hired the trainees. Assumptions used in the model should be revised to reflect actual practice. Further, the pay-back analysis should make use of retention data. Industrial Marketing Provides High Quality Services, But the Program May Not Be Using Resources Most Effectively Industrial prospects reported high levels of satisfaction with the services provided by the industrial development marketing program. However, improvements need to be made in the program to ensure that industrial development advertising is being used as effectively as possible, that resources are targeted into marketing territories which will provide the best return for State dollars, and that data are maintained and used to compare the relative costs and benefits of each marketing territory. The following recommendations are made: • DED should ensure that input from the marketing managers is reflected in the content and placement of industrial development advertisements, if industrial advertising is reinstated. • DED should evaluate the current industrial development marketing territories and staff assignments. This assessment should examine the costs and benefits of each territory. Consideration should be given to assigning more than one marketing manager to territories which appear to be especially active. • DED should ensure that a formal mechanism is established to monitor the activities of marketing staff in each territory. The procedures should include (1) developing a process for identifying high priority industries for marketing efforts, (2) developing budgets for each marketing manager, (3) developing a methodology for tracking expenditures by marketing territory, and (4) developing staff evaluation criteria and goals that are based on the potential of each territory. DED Should Develop Other Technical Assistance Programs for Communities The community certification program is the primary technical assistance program that DED provides for communities. While communities consider the technical assistance provided through this program to be very helpful, many communities are not enrolled in the program. Therefore, the technical assistance available to them is not sufficient to help them conduct economic development initiatives. The communities not enrolled in the program cited needs for technical assistance in developing local industrial call programs, developing marketing materials, and developing leadership for local industrial marketing efforts. The following recommendation is made: • DED should make additional technical assistance opportunities available to address the needs of localities that are not involved in or served by the community certification program. Industrial Call Program Does Not Appear to be Meeting the Retention Needs of the State The purpose of the industrial call program is to retain manufacturing industry by expressing the State's appreciation to the company for conducting business in Virginia and by offering the company ombudsman services for any problems related to State government. While the program is needed, the program staff have not set priorities which address the retention needs of the State. Criteria for visits are not determined based on which regions have retention problems, nor are they based on which industries have the most significant regional economic impact. The program focuses only on manufacturing industries of a certain employment level, rather than other basic industries. In addition, the program does not appear to have criteria for the visit schedule other than attempting to visit all regions within a four-year cycle. The following recommendations are made: • DED should modify the industrial call program to better meet the retention needs of the State. Industrial call staff members should assess each PDC for business retention problems as well as for key basic industries. Priority should be given to PDCs with above-average employment losses due to closures and contractions. Visits should include additional key basic industries, other than manufacturers. • Industrial call program staff should attempt to visit all industries on their call lists within a three-year period. The director of DED should consider the addition of one staff member to the program to ensure that the visit cycle is shortened and that additional key industries can be visited. Activities of Regional Offices Should Be Refocused DED has established regional offices in Abingdon, South Boston, and Staunton. The primary purpose of these offices is to provide technical assistance to communities in their regions, especially to help communities with certification. The need for community assistance services provided by the South Boston and Staunton regional offices appears to have decreased. However, the areas served by these offices are experiencing business retention problems. Refocusing the regional office directors' activities on industrial retention efforts appears warranted. The following recommendation is made: • DED should refocus the activities of the Staunton and South Boston regional offices. Industrial call program staff should instruct regional office directors on the necessary techniques and information to call on existing industry. This should be a priority activity for the offices. Small Business Development Centers Need Better Accountability DED administers a small business development center program in conjunction with the U.S. Small Business Administration. Six centers are currently operational, and there are plans to eventually have 11 or 12 centers statewide. In order to help ensure accountability of the centers, the program needs to develop standard definitions of services provided and economic impact measures. Current definitions are inconsistently used by the center directors, which results in misstatements of the level of center activity and the economic impact of services. The following recommendation is made: • DED should strengthen the accountability of the small business development centers by clarifying the definitions and reporting practices related to client services and program impacts for the small business development centers. Standard definitions need to be developed for determining length of counseling and economic impact. Further, procedures should be developed to eliminate double counting of clients in the quarterly reports. Virginia Small Business Financing Authority Has Limited Economic Impact Small businesses have used two types of financial assistance provided by the Virginia Small Business Financing Authority (VSBFA) since it was established in 1984. The issuance of Industrial Development Bonds (lDBs) was the principal activity of the Authority until the tax-exempt status of lDBs was eliminated by the United States Congress. The fees associated with lDBs allowed the Authority to generate revenue. However, lDBs are no longer attractive to small businesses, and the Authority was not allocated any additional IDB funding. Currently, the major activity of the Authority is the loan guaranty program. The State's guaranty allows small businesses which have been found to be credit-worthy by banks to obtain larger loans than they otherwise could. The assistance provided by the Authority is limited. In addition, the types of financial assistance currently provided may be available through other sources. Consequently, the program has limited utility. The following recommendation is made: • The VSBFA should work with financial institutions and other sources of private investment to develop additional financing programs. However, if such financing programs are not developed by the beginning of FY 1992, the General Assembly may wish to consider eliminating the Virginia Small Business Financing Authority due to the limited number of small businesses served and the projected inability of the Authority to generate enough revenue to pay for its operating expenses. Deficiencies Need to Be Addressed in the Technology Transfer Program Before Expansion is Considered The Center for Innovative Technology (CIT), in conjunction with the Virginia Community College System, administers a pilot program to assist small- and medium-sized businesses in improving their operations through an increased use of technology. However, changes are needed in the focus and management of the program. Inadequately defined goals and objectives have resulted in the program providing services which are not directed at technology, but are general business assistance services. Therefore, the services duplicate those provided by the small business development centers. In addition, the coordination and oversight provided by the CIT is insufficient. Further, the economic impact of the program as currently reported is misleading. The following recommendations are made: • The CIT should clearly define the role of the technology transfer program and the types of technology to be transferred as well as the types of businesses or organizations to be served. • Since the current structure for the technology transfer program limits the involvement of host community colleges. the CIT program director should increase his supervision of program directors at the community colleges. • The CIT should develop standard program impact measures to evaluate the technology transfer program. Guidelines which assist clients in estimating the economic value of the services should be developed and disseminated. • The CIT should institute eligibility criteria and refine program impact measures prior to any further consideration of expansion of the program. Following the refinement, data on the impact of the program should be collected for one year. If evaluation of that data indicates that the program has been effective, consideration should then be given to expansion. If the program is expanded, the CIT and DED should jointly consider the geographic coverage of the small business development centers before new sites are selected for the technology transfer program. The Structure of DED Is Generally Sound, But Modifications Are Needed to Ensure that Staff Resources and State Funds Are Used Most Effectively and Efficiently While the basic structure of the department appears reasonable, changes are needed to eliminate duplicative staff functions and fragmentation of work duties. In addition, changes are needed to provide a stronger research unit which can be used to respond to the policy analysis and evaluation needs of the agency and the secretariat. The following recommendations are made: • DED should consolidate the communications and public affairs and tourism public relations sections along with the tourism advertising director position into one section. • DED should consolidate the industrial development research section and the tourism research manager into one section. This section, research and policy analysis, should be able to provide the research analysis and evaluation necessary for agency program evaluation and policy planning. The agency director should reassess the need for contracted research and ensure that research is conducted in-house whenever possible. • DED should reassess the need for the assistant director of tourism position. Consideration should be given to abolishing this position and reallocating it within the Division of Tourism. DED's Management Has Improved; However, Additional Improvements Are Needed Stronger agency management and direction is needed to ensure agency accountability. The agency has very few written internal policies and procedures. The lack of administrative procedures has resulted in noncompliance with State procurement and accounting policies. The lack of program policies and procedures has resulted in inadequate management and oversight of the industrial training, industrial call, and industrial marketing programs. The following recommendations are made: • DED should develop and disseminate written procedures which direct administrative operations within the agency including accounting, budgeting, personnel, and procurement. • DED should ensure that the industrial training program institutes uniform procedures for estimating project budgets and for file maintenance and documentation. • DED should ensure that the industrial call program receives additional oversight. Staff should use a standardized visit report summary. Visit report summaries should be available in the project files no later than two weeks after the visit. • DED should develop written procedures to direct marketing managers' activities during negotiations between industrial prospects and local government officials. DED needs to continue to improve its internal communications. The lack of communication has resulted in staff being unaware of activities and actions within their own divisions, lack of awareness of activities in other divisions, and staff who are not in the central office feeling isolated from the department. The following recommendations are made: • DED should ensure that procedures which are developed to address communication problems within the department are enforced. • The director of DED should take steps to strengthen departmental communication. At a minimum, division-wide staff meetings should be held regularly and formal communication procedures and linkages should be established where needed. Two other management concerns need to be addressed by the agency. These concerns involve memberships in downtown Richmond clubs and an excessive span of control for one staff member. The agency uses State funds to maintain multiple memberships in two private downtown Richmond clubs. Since the memberships are for the conduct of business and not to serve as benefits for agency staff, agency accountability would be better maintained if these memberships were held in the director's name rather than the names of individual staff members. One section director within the Division of Tourism has an excessive span of control which has resulted in communication and supervision problems. However, if the welcome centers are closed or no longer administered by DED, the span of control will not be excessive. The following recommendations are made: • The director of DED should evaluate the need for multiple memberships in three downtown Richmond clubs. All club memberships should be maintained in the director's name. • DED should correct the span of control problem in the Division of Tourism by making the tourism marketing supervisor in the community development section responsible for supervising welcome center staff. However, if the welcome centers are no longer administered within DED, the tourism marketing supervisor should be assigned additional community development activities. A Comprehensive Economic Development Policy and Policy Process Are Needed Virginia does not currently have a comprehensive economic development policy or policy planning process which provides adequate planning, coordination, and oversight for its economic development activities. Such a policy is necessary to establish economic development objectives. A formal economic development policy process would help ensure that important goals and needs of the State are being addressed by economic development programs. Further, it would help maximize resources by establishing program priorities and by eliminating duplication and overlap among economic development programs. For the State to establish a meaningful policy, a policy development process must first be put in place. Three essential elements are needed to support such a process. The first element is in place, while the second and third need to be developed. First, the Secretary of Economic Development must be clearly designated and assigned responsibility for policy development and oversight. Second. reliable information must be available upon which to base policy decisions. The enhanced research and policy analysis section within DED would be able to provide the information necessary to make policy decisions. Third, a policy development process must be articulated and implemented. This process would ensure that the economic needs of the State are regularly and systematically addressed and that essential information is routinely communicated to the Governor and the General Assembly. The State's policy needs to incorporate several notions. It should be comprehensive and apply to all secretariats involved in economic development activities. It should focus on long-term concerns as well as short-term approaches. It should reflect the needs of the State as identified through various assessments. The following recommendations are made: • The Secretary of Economic Development should develop a formal, written, comprehensive economic development policy to guide the State's economic development efforts. The policy may be accompanied by plans or statements. The policy should focus on long-term solutions, define a proactive role for the State, and encourage communication and cooperation among the secretariats and with local and regional groups. Since the policy will focus on long-term solutions, the scope should extend beyond a single administration. • Each Governor should ensure that the Secretary of Economic Development develops a comprehensive economic development policy for the State during the Governor's first year in office. During that first year, the previous policy should either be formally incorporated, amended, or rejected. The new policy should then by submitted to the General Assembly. • The General Assembly may wish to amend Section 2.1-51.39 of the Code of Virginia to specify that the Governor shall provide, through Executive Order at the beginning of the Governor's term, for a cabinet-level committee to aid in the development of a comprehensive economic development policy for the State. The Secretary of Economic Development shall chair such a committee. |
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