Archive for February, 2012

WILL AUTO MANUFACTURING JOBS FULFILL MICHIGAN’S ECONOMIC DEVELOPMENT JOB QUEST?

February 29, 2012

On the way home from Gaylord last week, under a beautiful blue Michigan early spring sky, I found it easy to let my mind wander.

With little traffic on I-75 to give attention to, I began to think about the I-75 of the mid 1980’s and the formation of the Auto-nation alley corridor where manufactures began locating from Canada to the southern states of Alabama, Tennessee and the Carolina’s, all being connected by easy access to Detroit by I-75 where the “Big-3” car companies made a large portion of the 60% of the cars annually sold in the US.

Tool & die shops, plastic parts producers, and other suppliers, both big and small, sprang-up along this corridor as the “Big-3” began to out source and move toward what we now refer to as Tier I and Tier II (among other) suppliers.

Economic development in Michigan, for the most part, focused on new business location or expanding existing businesses into new buildings in industrial parks or on free-standing industrial sites.

Even studies I completed in the mid-80”s as a real estate consultant for the Detroit office of a national accounting firm endorsed the notion that the “Big-3” outsourcing of auto parts would continue to provide a continuous supply of new businesses and jobs.

Community economic development strategy focused on industrial parks and sites, both private and public owned, many developed using Michigan Community Development Block Grant, US Department of Agriculture, US Economic Development Administration and local government funds for infrastructure.

Today, it’s a completely different story. 

As my mind wandered, I began to think about the many Michigan communities I recently visited or worked in during the past 35-years and how many of them no longer have their auto related employers.  Many of these lost employers were the single reason for people living in the community.

It’s a hard realization that today the “Big-3” market share is in the 20-30% range of cars and trucks annually sold in the US and there is no longer a need for these smaller community-based employer’s products.

In southwest Michigan, where I spend most of my time today consulting and teaching, I studied the loss of manufacturing employment between 1980 and 2008.  I found County Business Pattern data showing that manufacturing employment, while continuing to make an equal contribution to the gross county product (the total value of goods & services), has decreased employment by 55% over 16,000 jobs.

What I also found is that southwestern Michigan has replaced the lost manufacturing jobs with HEART jobs – hospitality, entertainment, arts, recreation and tourism.

On the surface this sounds good but, looking at the average wage contribution by job ratio, one finds a hard fact – a HEART job, at best, contributes only 20% of the wages of a manufacturing job.

So as I journeyed home on this warm spring day, my thoughts focused on what’s important for Michigan communities to “think about” and what do they do to strengthen their economic vitality.

In my opinion Michigan’s future community economic development will be shaped by the following: 

  •  the recognition that the local economy will change,
  • an understanding that consumer spending patterns will likely decline until population, more specifically, household growth resumes,
  • an understanding that future local government tax revenue for expanded governmental services economic development strategy requires population growth and new jobs,
  • governmental “sustainability” must first focus on service maintenance and service expansion later,
  • the realization that household income will not increase until new job growth returns and under and unemployed residents are working in “good jobs” defined as 35-hours per week providing county average household incomes. and
  • acceptance that HEART jobs create seasonality in the business economy adding a new requirement to business planning and cash flow management.

To help my understanding, I picked-up two books to read –

The End of Detroit – How the Big Three Lost Their Grip On The American Car Market by Micheline Maynard.

Overhaul – An Insiders Account of the Obama Administration’s Emergency Rescue of the Auto Industry by Steven Rattner.

Several interesting thoughts emerged from these readings. Maynard in her book, published in 2003, states that the auto industry suffers from “myopia, stubbornness and bureaucratic malaise among other maladies” that:

  • prohibit them from supplying products to smaller market segments,
  • prohibit them changing away from mass auto supply manufacturing strategy to a more customer based selection methodology, and
  • embraces an economic model that results in diminished profitability that precludes them from having enough income to support the vast changes needed.

She concludes that in the future customers will only support “the best quality and most desirable products” which may not be products offered by the “Big-3”.

By 2010 according to her:

  • One, or more, “Big-3” company will shrink forced by financial crisis even seeking Chapter 11 reorganization protection,
  • One “Big-3” company will seek a foreign partnership for survival, moving management control into foreign hands, and
  • The remaining two will service a much smaller market share.

Looking back over the shoulder of time, her predictions were extremely profound, to say the least.

Fast forward to Rattner’s history of the “Obama Auto Team” provides another view. 

In his opening remarks, Rattner credits the demise of the “Big-3” to:

  • Failure of management,
  • Globalization,
  • Oil prices,
  • Organized labor, and
  • Dysfunction of Congress.

It’s interesting to read a “before and after” the economic crisis summary of the “Big-3” auto industry’s ability to manage and reorganize their businesses in face of crisis.

Because so much Michigan’s manufacturing job base is connected to automobile production and  now that national public policy has venture into the realm of industrial policy to retain the economic viability of automobile production, the question is whether Michigan’s manufacturing jobs will return.  Will auto manufacturing replace the lost jobs, and will those jobs return to the now vacant plants and facilities scattered throughout Michigan.

In Rattner’s opinion “manufacturing as a percent of total jobs were inevitably going to decline; the more reasonable objective – still tough – should be to try to maintain and ideally grow the absolute number of these jobs.

[With the auto bailout] we chose to move dangerously close that discredited approach [industrial policy] again, in our well-intended effort to jump-start the economy.  When the dust settles we will be disappointed by how little lasting benefits we get.”

The question remains, will future Michigan auto jobs be sufficient in quantity to have an impact upon Michigan’s population and household growth and ultimately “full-time – good paying” employment.

My honest evaluation is that Michigan cannot go back to the economic development strategy that places its greatest emphasis on repopulation of next generation auto manufacturing jobs.

The state economic development strategy must acknowledge the need for wide diversity  of jobs – especially jobs that can located in our small to medium sized communities as well Michigan’s “core communities” where historic state economic development strategy has focused.

The future of many of the smaller communities that once relied on an auto related major employer for their economic survival need this “life line” for future economic sustainability.

THE COMING GLOBAL JOB WARS – ARE YOU PREPARED?

February 16, 2012
  
Gallup pollster Jim Clifton shares some
interesting global facts:
 
7b people
3b want to work
1.2b formal jobs exist
1.8b jobs shortfall
50+% deficit of full-time jobs
 
Scary information – to say the least!

Jim Clifton (Chairman of Gallup), in his newly released book “The Coming Job Wars” states that globally, politics will focus on this dilemma ….how to double the number of globally available good full-time and part-time formal jobs defined as 30-hour weekly employment paying living wages.

In the future the United States will compete, along with every country, state and local territory for these new jobs.

Clifton opines, since 70% of US GDP (Gross Domestic Product) is based on consumer spending any solution to job creation “requires consumer spending and any solution to job creation requires a lot of consumer spending or the GDP falls leading to less spending and higher unemployment”.

He concludes the US GDP growth rate is most important to job growth and, in the future, US GDP growth will come from global customer demand.

What’s needed today to remedy US and global unemployment according to Clifton, is a “transformational event that will cause a sudden extra ordinary surge of entrepreneurship and innovation just like the introduction of new technologies 30-years ago that saved America from the 1970’s recession” a technology transformation which created new global customer demand.

He further states the US has an oversupply of innovation and an undersupply of entrepreneurship; “innovation is not rare in America, neither is creativity, rather there is mass shortage – a significant undersupply – of successful business models”.

According to Clifton, “America’s job creation needs to focus on the connection between innovation and entrepreneurism – the person – the entrepreneur”.  He states that entrepreneurs are rare – “lots of people have good ideas, but most new businesses fail.  It’s not for the will or passion, but the lack of customers “and business knowhow.

While most Americans believe the US is run by “big business” in reality America is dominated by small and medium sized businesses – those with less than 500 employees which represent 99% of the proximate 6 million businesses with at least 1 employee.

Clifton believes it is here, these small to medium sized businesses along with entrepreneur formed new businesses is where job creation is most likely to occur.

He further opines that US GDP must grow at a minimum of 5% in order to create sufficient jobs to remedy present unemployment…this being double the near-term best future growth rate offered by leading economists.

This is how we get there –

1. Make Entrepreneurism a #1 Public Priority

The goal of economic policy must embrace the notion that private sector employment is most important.  Clifton opines that “if the overwhelming majority of Americans are not working outside of government jobs, America will go broke”.  He further states that “when GDP falls so does the amount of money government’s share [used] to fund services” 

The solution is to create new businesses which will create “new jobs” thus increasing GDP.

2. Seek Early Identification of Individual Entrepreneurial Potential

Researchers have documented a number of characteristics of people that start businesses.  The most common entrepreneurial traits include 1) parents that are entrepreneurs, 2) early age business involvements, 3) ability to take risk and 4)  an individual stick-to-itiveness personality trait.

According to researchers, these traits can be identified in youngsters aged 8-12 years when early education and mentoring can be provided to encourage them to consider entrepreneurship and business ownership as a chosen career choice.

The solution is to test and identify entrepreneurship personality traits of young people, most likely, as part of current K-12 student education testing programs.

3. Introduce Entrepreneurship as a Career Choice in Early Education

Today’s education system is designed to prepare youth for many types of careers, but often does not provided encouragement nor specific training for entrepreneurial careers.

There are a number of educational program designed to remedy this deficiency, however educational programs seldom integrate these into the classroom experience.

The solution is to redesign current K-12 educational programs to integrate entrepreneurship course content as a career choice equal to the emphasis given to college preparation course content.  

 4. Provide Our Youth Entrepreneurial Opportunities

A 2010 Kaufmann Foundation sponsored study survey shows that “interest in starting a business is consistent among tweens (eight- to 12-year-olds – 39 percent), teens (13- to 17-year-olds – 39 percent), and young adults (18- to 24-year-olds – 41 percent). Males (45 percent) are more likely than females (35 percent) to be attracted to business ownership.

The research concluded that “youth who personally know another entrepreneur have the strongest interest in starting their own businesses. Among youth who know an entrepreneur, almost half (46 percent) would like to start, or already have started, businesses, compared to only one-third (31 percent) of the young people who do not know a business owner”. (Underline added)

The importance of business owner contact and actual business experience contact is critical to shaping the personal characteristics and propensity for young people to pursue entrepreneurship and as career choice.

The solution is to provide business owner contact and business experience for young people – more Junior Achievement programs – more child operated lemon aid stands please.

5. Reformulate Government Assistance Programs to Reduce New Venture Risk

Starting up a business is costly.  Start-up costs many times include attorney, accounting, monthly banking fees, plus computer software purchases that can easily add up to $1,000 in the first year, more if you have partners in your business requiring partnership agreements, filing incorporation paperwork, etc.

All of these require immediate cash payments, always coming from the entrepreneur’s pocket.

Young businesses need cash, typically more than planned.  Elimination or deferral of startup expenses may be the difference between success and failure in the first year of operation.

The solution to encourage new business formation is to remove these start-up costs or allow payment of them upon the first anniversary of the business formation.

6. Incent Commercial Lenders and Investors to Accept New Business Start-up Risk

Lenders and investors are, by their very nature, adverse to accepting risk. They are trained to identify how and why a business can fail and to install loss prevention programs for any investment they make in a business.

While business risk aversion is a good thing the amount of risk lenders and investors are willing to assume varies.  Risk is measured by commercial lender interest charged for use of funds or investor dividends paid and resultant increased value of their investment in the business.

New business start-ups being “more risky” imply greater risk requiring higher interest charges, higher dividend payments and higher business ownership valuation to secure business start-up funding.

Since interest, dividends and capital gain on the sale of business interests are all taxable – federal, state and, where applicable, locally – after tax return on investment becomes the final measurement of the investment in a new start-up business.

The solution to expanding the amount of capital dedicated for new business start-ups is to reduce or eliminate taxation for a period of time for funds loaned or invested in new start-up businesses.

Last Thoughts

Today job creation is caused by a “rare breed of people” those of a certain state of mind having a business plan of action, a totally consuming idea resulting in unstoppable determination and optimism, an unwavering confidence in their personal business skills plus understanding of what customers really want.

These rare soles understand that customer relationships “trump” all business challenges and leads to identification of new products and services desired by customers and when provided by the business assures success.

It’s these “rare soles” that ultimately produce additional GDP, by creating innovative products and services for which new jobs will be required to produce and deliver the products and services to the customer.

If Clifton is correct, and a new transformational innovation is required to fill the global job deficit, it will most likely come from a start-up business idea.

CALIFORNIA TERMINATES REDEVELOPMENT TIF’S – WILL MICHIGAN BE NEXT?

February 6, 2012

California has always been a national trend setter.  It gave us the hippies of the 70’s, Silicon Valley in the 80’s and 90’s and tax limitations in the 00’s.

If being a leader is a forecast of the future, California’s repeal of its Redevelopment Agency enabling legislation in June 2011 may signal similar action by state legislatures elsewhere.

Could Michigan be one of them?

Governor Jerry Brown, under the authority of California’s fiscal emergency legislation enacted two bills (The Termination Bill & The Continuation Bill), “to secure funding for ‘core government services’ including fire protection, police and schools”.  His action bares the state’s 400 Redevelopment Agencies from conducting new business and provides for their windup and dissolution effectively terminating use of Tax Increment Financing in California.  The action did however, allow cities and counties that created Redevelopment Agencies to continue operations if they agree to make continuous payments to fund core government services.

Challenged (July 2011) at the California Supreme Court level by local government Redevelopment Agency sponsors, the court recently upheld the law. In its ruling (December 29, 2011), the Court held that “if the legislature creates a political entity, it can later dissolve it, baring specific Constitutional removal of power”. 

The Court ruling established February 1, 2012 as the terminal date for the state’s 400 Redevelopment Agencies.

This is a major philosophic change in practice of economic development.

California was one of the first states to recognize the need for special financing tools to eliminate blight, establishing in 1945 legislation allowing the use of a portion of property taxes to create public/private partnerships to eradicate blight.  It was the first state to use tax increment financing in the early 1950’s whereby taxes paid on the value of new development was redirected to pay for government supplied infrastructure needed to serve the new development.

Like almost every state, Michigan followed suit enacting similar legislation in 1980’s that gave local government specific power to establish a special purpose local government authority that can establish a tax increment financing district and redirect a portion of real estate taxes to a special fund, funds which are to be used to promote economic development or another specific purpose specified by the authority.

Today Michigan has over a dozen special purpose authorities authorized to use tax increment financing. In fact, to many economic development practitioners, the use of tax increment financing is the “back bone” of local government economic development efforts.

These special local government authorities and use of TIF funds is one of the top, if not the top, Michigan economic development tool to attract and incent new development. 

With the constriction of developer bank financing for project infrastructure today, economic development practitioners in almost every development project consider use of TIF financing for funding required infrastructure improvements needed to make the project happen.

Is Michigan in line for TIF termination?

For the past several years, this author has watched as university research and public and private “think tanks” have studied use of Michigan tax increment financing authority. 

There is no doubt that TIF has been used inappropriately in many cases, the most flagrant misuse being use of TIF funds for purchases and services that would ordinarily be funded by the operating budget of the local government.  Some example being the purchase of public works vehicles since they plow snow in the authority district, purchase of street signs both in and outside the district, replacement of street light luminary globes, development of a park next to the authority district to attract visitors, payment of salaries for the portion of time government employees spend doing their regular job in the special purpose district.

In my opinion call for termination of TIF due to misuse is inevitable.

However we must remember the original purpose of TIF was to provide infrastructure financing not to replace local government general fund budgeted expenditures.

Here’s why TIF in Michigan is necessary. 

During the economic good times land use planners and government officials could require developers of new projects to pay-for, install and donate to local government both on-site and off-site infrastructure necessary for their project.  Today developers are not inclined to do so.

If the private developer can’t or won’t fund public infrastructure needed for new development, the burden is upon Michigan local government to do so in order to support future new growth and development.

With revenue limitations upon local governments TIF may be the only means to effectively financing infrastructure necessary for new development.

There is no doubt in my mind that TIF termination will be on the legislative docket for discussion as Michigan’s financial emergency is no different that California’s.

My hope is that Michigan’s TIF returns to its original purpose “project infrastructure financing”.

 _ _ _ _ _ _ _ _ _ _

(For an overview of Michigan TIF’s see: Michigan Tax Increment Financing: A Primer; Planning & Zoning News, Dec. 2008, p.11-14).

(For a description of the importance of TIF in Michigan Economic Development see:  If Not TIFA, Then What?; Planning & Zoning News, May 1994, p. 5-8)

RIGHT-TO-WORK TO INTENSIFY MI-IN ECONOMIC DEVELOPMENT BORDER WAR

February 4, 2012

Indiana will be the only right-to-work state to be completely surrounded by non-right-to-work states ….I recently talked to my counterpart at the Michigan State Chamber of Commerce on the phone who said if we [Indiana] pass right-to-work you’r going to kill us in the economic development wars.

http://www.insideindianabusiness.com/video.asp?id=-1&v=1559

Effective today (February 1, 2012), Indiana’s new right-to-work law will intensify the age old Michigan vs. Indiana economic development war over new jobs and business investment.

For economic development practitioners it’s time to think about the impact of having the first Midwest right-to-work state at our border to Michigan’s competitive position for creating new jobs and business investment.

Lets first forget the pros and cons of right-to-work; it’s passed and now is part of the new landscape of economic development impacting Michigan.

As someone who has pursued a career in Michigan land use planning and economic development for well over 30-years, its obvious to me that economic development practitioners need to prepare.

Here’s how I expect Indiana’s right-to-work law will impact the practice of economic development in Michigan.

1. Right-to-Work will be a Major Economic Development Conversation Topic

Because Indiana will be the first Midwest State to fully embrace right-to-work, Michigan efforts to equalize this action will intensify

Union busting and deflation of wage rate claims will be countered with population growth and increased state gross income claims.  This rhetoric will result in political inaction increasing business economic uncertainty.

Expect Lansing right–to–work rhetoric to escalate resulting in suspension or, in some cases, compete halting of business decision making until certainty is restored.    

Expect to be questioned about uncertainty and probable outcomes of debate that may result in Michigan enacting right-to-work legislation.

 2.      Michigan will Mount a Legislative Rebuttal Seeking Right-to-Work

Forced by Indiana’s action and to mitigate the economic development imbalances that may result, the Michigan legislature will be forced to consider legislation authorizing right-to-work either on a permanent statewide basis or, at minimum, for experimental special purpose sub-state zones.

Expect the legislature to experiment, most likely with special districts where right-to-work can be tied to direct job creation by new businesses locating in the zone – this being Michigan’s historic means of “putting a toe into the water to test the economic and political temperature”.

  3. Recognize that Unionization is a Cost of Doing Business in Non Right-to-Work States.

Economic developers will need to acknowledge that unions impose a cost on business.

Even in the most harmonious business-union states, unionized businesses face added administrative expenses – accounting, legal and management time to attend to employer duties of a union shop.

Expect new businesses seeking to locate in Michigan to question the harmony between local business and local unions to identify the true employer cost burden of harmonious and other business-union relations.

 4. Right-to-Work to be a “Bargaining Chip” in New Business Site Selection

Let’s face the fact that Indiana’s right-to-work – whether we believe it aids business or not, will be used as a bargaining chip when a business negotiates location incentive packages from Michigan communities.

While claims can be made that right-to-work does not expressly grant a specific job advantage (See Wall Street Journal Article 1.27.2012 ), Michigan economic developers will need to prepare for the request for additional incentives to compensate for perceived or real economic differences between Indiana and other Midwest states.

Expect to be requested to provide additional incentives to over compensate for the “real or perceived” economic differences of a union vs. nonunion state economic environment.

 5. MI-IN Border War to Intensify

Indiana is known to take quick action of its economic development superiority as evidenced by the business solicitation billboard erected at the Illinois-Indiana border upon passage of a business tax increase in Illinois in 2011.

Expect to see an onslaught of advertisements and direct business solicitations extolling the virtues of right-to-work in Indiana as one more economic advantage Indiana has over Michigan.

Economic developers must prepared now to identify counter measures to disqualify or mitigate the real or perceived Indiana economic benefits as part of their economic development business retention and attraction strategy.

6.  Michigan Economic Development to Become Less Menu Driven and More Sensitive to Business Economics.

As a 35-year veteran in land use and economic development, I have been involved in Michigan economic development since its origination in the early 1970’s.

For the most part, a majority of Michigan economic development practitioners are “menu trained”, that being we are given a menu of state and federal programs and incentives and then told to offer these to new and existing businesses to create jobs and new investment.

Only limited business training is provided on business organization and management or understanding markets and customers businesses serve.

It’s uncommon for economic development practitioners to “drill down” and study markets and customers and to prepare actual business plans to identify cash flow, the vital life blood of any business.

Recently, I came across the phrase” jobs occur where customers appear” while reading The Coming Jobs War by Jim Clifton.  It’s a pretty simple message – without customers there is no need for the business and no need for employment.  The message in this statement for economic development practitioners is the need for understanding businesses economics and how to increase “customers” for local businesses – this will become part of the skills required of economic developers in the future.

Expect business economic strategies which improve customer counts to be critical ingredients of future economic development strategy.

 Last Thoughts……..

Undoubtedly Michigan’s economic development platform is poised for change and this change will be effect day-to-day economic development practices.

Michigan economic development practitioners must prepare today to react to these changes.

At no time in my 35-years working in Michigan has there been the opening for such a wholesale change in the way economic development is practiced.

Regardless of your position on right-to-work, the practice of economic development in Michigan is set to change …and the changes will be significant and monumental.

In the future, economic development practitioners will be called upon and “graded” not only on the use of “menu driven” Michigan economic development tools but on the success in expanding and creating new businesses without use of incentives, but techniques that result in increased customers producing business cash flow.