The State's Role in Urban Economic Development: An Urban Government Perspective Urban Consortium Information Bulletin U.S. DEPARTMENT OF COMMERCE Economic Development Administration Public Technology, Inc. Public Technology Inc., is the applied sci- ence and technology organization of the National League of Cities and the Interna- tional City Management Association. It is a nonprofit, tax-exempt, public interest or- ganization established in December 1971 by national, state, and local public interest groups. Its purpose is to help local gov- ernments improve services and cut costs through practical use of applied science and technology. PTI sponsors the largest local government cooperative research, development, and technology transfer ef- fort in the nation. Public Technology, Inc., derives core finan- cial support from its member jurisdictions. Grants and contracts from foundations, Federal agencies, and private corporations also support PTI activities. Public Technology, Inc., programs address technologically remediable problems. The problems must be identified by state and local officials as having high priority and must be pertinent to communities throughout the nation. The grouping of specific markets at state and local levels of government enables jurisdictions to share costs and benefits of PTI programs and en- courages investors to underwrite the problem-solving efforts. The Public Technology, Inc., application process begins with the definition of the problem. Next, PTI locates applicable technology, develops new or improved products or systems, packages and dis- seminates the technology, and helps local governments adapt it for use. All PTI pro- grams stress the transfer and use of the technology by the largest possible number of jurisdictions. Public Technology, Inc., serves as the sec- retariat and coordinates the activities of three national networks to strengthen pub- lic management. These networks help in- tegrate science and technology into the operations of local governments. The net- works are the Urban Consortium (repre- senting cities and counties with popula- tions larger than 500,000), the Urban Technology System (serving local govern- ments with populations of 50,000 to 500,000), and the Community Technology Initiatives Program (representing local governments with populations smaller than 50,000). PTI also participates in the International Urban Technology Exchange Program, Ltd., (IUTEP) and has developed working relationships with a number of major in- ternational organizations. Public Technology's Board of Directors includes Alan Beals, Executive Director of the National League of Cities; Mark E. Keane, Executive Director of the Interna- tional City Management Association; Robert A. Kipp, City Manager of Kansas City Missouri; the Honorable Christopher Lindley City Council Member, Rochester, New York; Donald F. Mclntyre, City Man- ager of Pasadena, California; and the Hon- orable Tom Moody, Mayor of Columbus, Ohio. Their guidance, and the advice of the fifteen local officials who are members of PTI's Advisory Council on Research and Technology Transfer, help identify local government needs and improve the corpo- ration's work program. September 1980 The State's Role in Urban Economic Development: An Urban Government Perspective Urban Consortium Information Bulletin U.S. DEPARTMENT OF COMMERCE Economic Development Administration Economic Research Division Philip M. Klutznick, Secretary Robert T. Hall, Assistant Secretary for Economic Development Prepared by Leanne Aronson and Carol Shapiro Public Technology, Inc. Washington, D.C. *** TO 'C \. / V \ i v.,-. r \ / **T.,0»* \& Urban Consortium Public Technology, Inc. DISCLAIMER This publication was prepared under a grant from the Economic Develop- ment Administration, U.S. Department of Commerce. The statements, findings, conclusions, recommendations, and other data in this report are solely those of the authors and do not necessarily reflect views of the Economic Development Administration. FOREWORD This Information Bulletin is one of a series of reports prepared by the Community and Economic Task Force of the Urban Consortium under a grant from the Economic Development Administration's Economic Research Division. The overall purpose of this project is to facil- itate the active involvement of local government officials in the eco- nomic research and development process and to make the Economic Devel- opment Administration's research program responsive to the needs of large urban jurisdictions. The bulletins in the series deal with topics that the Task Force, which is made up of local officials, has identified as priority con- cerns. Information Bulletins were developed on each of the following topics: • Local Business and Employment Retention Strategies • Early Warning Information Systems for Business Retention • The Impact of Local Tax Policy on Urban Economic Development • The Impact of Federal Fiscal Policies on Urban Economic Development • The State's Role in Urban Economic Development: An Urban Government Perspective • The Role of the Arts in Urban Economic Development The Information Bulletins provide nontechnical overviews, from the local government perspective, of issues, problems, and current approaches for dealing with important urban economic development con- cerns. I am certain that local economic development practitioners and officials at all levels of government will find the bulletins informa- tive. Victor A. Hausner, Deputy Assistant Secretary for Economic Devel- opment Policy and Planning, EDA, guided the project. I wish to give special thanks to Jeanne McFarland, Chief of the Economic Research Di- vision, and to Gerald Duskin, the project officer. Robert T. Hall Assistant Secretary for Economic Development U. S. Department of Commerce PREFACE This Information Bulletin is one of several prepared by the Com- munity and Economic Development Task Force of the Urban Consortium. The Urban Consortium is a formal organization of the nation's twenty-eight largest cities and nine large urban counties, which have joined together to increase the relevance of national research and development programs to the priority needs of urban areas. The Con- sortium provides a unique forum through which urban governments can work to define their common needs, identify high priority topics for research and development, participate in cooperative research with Federal agencies and researchers, facilitate demonstrations, improve the transfer of information to and among jurisdictions, and provide useful feedback to Federal agencies on proposed initiatives. The Community and Economic Development Task Force of the Urban Consortium is one of nine Consortium Task Forces which have been or- ganized to focus on priority urban R&D issues in nine functional areas. Through the Task Force, senior-level local government officials work to encourage research, development and demonstration activities which ad- dress priority community and economic development needs of large urban governments. Broad areas of interest include: community development, urban economic development, planning, neighborhood revitalization and housing. Each Information Bulletin covers a priority local government con- cern; it is designed to serve two purposes. First, it provides the members of the Task Force with a common information base from which an overall R&D agenda and specific research initiatives can be developed. Second, it provides government officials, the research community, and others with a general statement of a priority need area, and an indica- tion of the Consortium perspective and interests in seeking research resources to solve a priority problem. An Information Bulletin concisely states the problem and major is- sues associated with a need statement; explores the state-of-the-art and practice; identifies model practices, resource persons, and mate- rials; and suggests potential research initiatives to respond to unmet needs, if any. In many instances, an Information Bulletin has served as a catalyst for local government collaboration with Federal agencies and the research community in addressing a local government concern. The work of the Community and Economic Development Task Force and the development of these bulletins have been supported by the Economic Development Administration, Economic Research Division, under grant #ERD-684-G-79-21 (99-7-13493). The help and support of Victor Hausner, EDA's Deputy Assistant Secretary for Economic Development Policy and Planning, Jeanne McFarland, Chief of EDA's Economic Research Division, and Gerald Duskin, Project Officer for this project, is gratefully acknowledged. Digitized by the Internet Archive in 2012 with funding from LYRASIS Members and Sloan Foundation http://archive.org/details/statesroleinurbaOOaron URBAN CONSORTIUM MEMBER JURISDICTIONS Atlanta Baltimore Boston Chicago Cleveland Columbus Dallas Denver Detroit Houston Indianapolis Jacksonville Kansas City Los Angeles Memphis Milwaukee New Orleans New York Philadelphia Phoenix Pittsburgh St. Louis San Antonio San Diego San Francisco San Jose Seattle Washington, D.C. Dade County, Florida Hennepin County, Minnesota Hillsborough County, Florida Jefferson County, Kentucky King County, Washington Maricopa County, Arizona Montgomery County, Maryland Prince George's County, Maryland San Diego County, California URBAN CONSORTIUM COMMUNITY AND ECONOMIC DEVELOPMENT TASK FORCE Local Government Members William Stafford (Chairman) Manager Office of Intergovernmental Relations Seattle, Washington Bernard Berkowitz Physical Development Coordinator Office of the Mayor Baltimore, Maryland Marilyn Burkhardt Special Assistant for Commission Affairs New York City Planning Commission New York, New York Narciso Cano Director Department of Economic and Employment Development San Antonio, Texas Alan Canter Director Department of Planning Denver, Colorado Robert Fichter Director Parkman Center for Urban Affairs Boston, Massachusetts Carole Thompson Executive Assistant Department of Housing and Community Development Washington, D.C. David Larson Assistant Commissioner Department of Planning, City and Community Development Chicago, Illinois John Lynch Director Department of Planning and Community Development King County, Washington Joseph Vitt Director Department of City Development Kansas City, Missouri George Williams Assistant Director Department of Planning San Francisco, California Glenwood Wilson Community Services Manager Phoenix, Arizona Rona Zevin Director of Neighborhood Policy Office of Policy Planning Seattle, Washington U.S. Department of Commerce Victor Hausner Deputy Assistant Secretary for Economic Development Policy and Planning Economic Development Administration Leo Penne Chief Policy Development and Coordination Division Economic Development Administration Jeanne McFarland Chief Economic Research Division Economic Development Administration Gerald Duskin Project Officer Economic Research Division Economic Development Administration Public Technology, Inc. Staff — Community and Economic Development Program Thomas Chmura Program Director Community and Economic Development Program Portia Johnson Administrative Secretary Carol Shapiro Project Manager Economic Development Project Susan Harding Secretary Donna Sorkin Project Manager Community Development EXECUTIVE SUMMARY This Information Bulletin reviews the states' record on local economic development from the perspective of large, urhan lurisdictions . As the au- thors note in Chapter I, there has heen much recent interest in examining the potential henefits of heightened state intervention in local economies. For the most part, however, little concern or attention has been directed to the question of what an expanded state role in local economic development might mean for large cities and urban counties. Accordingly, this bulletin is in- tended to begin an exploration of the subject from this perspective and to alert urban officials to the possible implications of heightened state in- volvement in urban economic development matters. State governments have decisive power over local economies. State fis- cal, regulatory and expenditure policies influence the local development cli- mate, the cost and desirability of doing business, and the level of expendable income in the local jurisdiction. Also, recent pieces of Federal legislation, such as the Clean Air Act Amendments of 1977, fundamentally alter the role of the states in shaping local economies. These factors, added to current polit- ical and economic forces such as Proposition 13, soaring inflation, attempts to balance the Federal budget (and corresponding cutbacks in funds to local governments) , make states an important source of revenue and influence for central city economic development. Chapter II of the bulletin catalogues the possible avenues of state intervention in urban economic development and at- tempts to inform the local practitioner of the range of powers and resources available to the states for remedying urban economic distress. An underlying theme of the bulletin concerns the well-recognized fact that the policies of state governments in this country have historically fa- vored small towns, suburbs, or rural areas. The authors suggest that large urban jurisdictions must closely examine what a greater national reliance on state intervention in local economies will mean for them. While evidence sug- gests, today, that the nature of state intervention in local economies is changing and becoming more sensitive to some central city concerns, and that greater coordination between local and state governments on central city de- velopment projects is taking place, it is still not clear whether this spells advantage or disadvantage for central city economic development. Chapter III raises this and other relevant policy issues which face large cities and urban counties confronted by an expanding state role. This includes the implica- tions for large cities of "targeted" development strategies as opposed to "balanced growth" approaches, the appropriate role for states to adopt vis- a-vis the private sector, and the costs and benefits to urban jurisdictions of state intervention in local economies. The chapter concludes with a dis- cussion of the role urban governments might play in the creation and over- sight of state-local development policies. Chapter IV presents an overview of current state-local development activ- ities, touching on common achievements and shortcomings., as well as regional distinctions among state approaches to local growth and decline issues. This is followed by a more detailed presentation of a number of promising state initiatives to spur local development. In chapter V, the authors note that while it remains to be seen whether the aggregate effects of greater state involvement are beneficial or damaging to large cities, important short-term questions need to be addressed at the Federal level to help cities better navigate their course, with their states, in the 80' s. One important question concerns how and to what extent current Federal programs influence state involvement in central city development. For example, programs such as the Economic Development Administration's (EDA) 302 planning programs impact the process of state and local economic interaction on economic development planning and ultimately affect central city develop- ment outcomes. How are changes in Federal programs and new programs being viewed in terms of changing state-local roles, and their implicit effects on urban economic development? A survey conducted by the authors in the development of this Information Bulletin shows that cities and states are increasingly coordinating their de- velopment objectives and participating jointly in development schemes in cen- tral cities. However, not much information is available to the local practi- tioner on the processes cities and states are using to accomplish and coordi- nate such important economic development objectives as business retention and small businesses development. And there is continuing debate as to whether increased state involvement in local economies will help or harm urban areas. These questions and others worthy of research are explored in this chapter. The last chapters, chapters VI and VII, provide the reader with a list of individuals and organizations to contact for further information. A bibliog- raphy is included as well. TABLE OF CONTENTS Page I. PROBLEM STATEMENT 1 II. THE PARAMETERS OF STATE INTERVENTION IN URBAN ECONOMIES 5 State Fiscal Roles 5 - Constructing an Effective Fiscal System 5 - State Fiscal Policies To Aid Needy Local Governments 9 State Regulatory Roles 12 - Banking 12 - Insurance 14 - Environmental, Water, Air Quality and Land Use Requirements 15 - Permit Procedures and Requirements 16 State Delegation of Local Powers and Responsibilities 16 - Local Taxing Authority 16 - Local Borrowing Authority 18 - Local Ability To Create Economic Development Authorities 19 - Local Functional Discretion 20 Employing State Expenditures To Affect Local Development Opportunities 20 - State Procurement Policy 20 - The Siting of State Facilities 21 - State Credit Policy 21 - The Investment of State Pension Funds 22 - Direct Development Grants 22 Constraints on State Roles 23 - Constitutional Constraints 23 - Fiscal Constraints 24 - Political Constraints 25 III. ISSUES ANALYSIS 27 Targeting Versus Balanced Growth 27 - Does Targeting Favor Large Cities? 27 - Are the States Targeting Economic Development Aid? 28 - Why Do States Prefer Balanced Growth to Targeting? 28 - Should Large Cities Favor Heightened State Involvement in Urban Economic Development? 30 Toward an Urban Government Role in State Economic Development Policymaking 31 - The Costs and Benefits of State Intervention in Local Economies 31 - A Central City Perspective on Heightened State Involvement in Urban Economic Development 33 - The Need for Local Involvement in the Creation of State Economic Development Policies 34 - New Approaches To Promote State-Local Interchange in Economic Policy Development 37 Page IV. CURRENT APPROACHES 39 State-of-the-Art : Recent State Economic Development Efforts 39 Promising State-Local Economic Development Activities 41 - Comprehensive Development Strategies 41 - Infrastructure Development 44 - Industrial and Commercial Facilities Development 45 - Small Business Assistance 46 - Assistance for Community-Based Organizations 47 - Assistance To Enhance Local Development Capabilities 48 - Job Training 49 - Regulatory Reforms to Spur Local Economic Development 51 - Fiscal Reforms To Enhance Urban Economies 52 Recent and On-Going Research on State-Local Development Activities 53 - Present Condition and Probable Direction of State Urban Policy Research 53 - Recent and Forthcoming Reports on State Urban Policy 54 V. RESEARCH NEEDS AND OPPORTUNITIES 56 Assessing the Impacts of State-Local Development Efforts 56 Identifying Community Distress 56 Comparative Studies of Targeted and General Assistance Programs 56 Integration of State Manpower Aids and Infrastructure Development Efforts 57 Federal Roles in State Development Policy 57 Information Transfer Networks 57 Documenting State and Local Processes Used To Carry Out State Economic Development Objectives 58 VI. INFORMATION RESOURCES 59 VII. SELECTED BIBLIOGRAPHY 60 APPENDIX - SURVEY OF URBAN OFFICIALS ' VIEWS ON STATE ECONOMIC DEVELOPMENT POLICY 62 I. PROBLEM STATEMENT State governments are influential actors on the local development front. Historically, state fiscal, regulatory and expenditure policies have influenced local economies both directly and indirectly. From taxing personal and corporate income to regulating banking and insur- ance practices, state actions have affected the local development cli- mate, the cost and desirability of doing business, and the level of expendable income in local jurisdictions. While state statutes and administrative regulations greatly in- fluence the health of local economies, the bulk of state development policy has been constructed with little knowledge or concern for how state actions affect urban economic growth. Until recently, the sub- ject received remarkably little attention from public policy planners. For a variety of reasons, however, interest in understanding the impacts of state fiscal, regulatory and expenditure policies on urban economic development is growing. This interest is sparked by a recog- nition that the states have the constitutional power and responsibility to solve urban problems which cut across local boundaries. As stated in the final report of the White House Conference on Balanced National Growth and Economic Development: In urban areas, the traditional system of local government makes no provision for agencies with power, resources or capability to handle areawide issues on an areawide basis across local govern- ment boundaries. The kinds of problems encountered range from highways, mass transit, water supply and sewage disposal, to pro- vision of a wide range of housing opportunities with access to job locations, to fiscal equity and a tax base adequate for capital needs. In some cases, these problems can be solved cooperatively because the interests of adjacent local governmental units co- incide; in other cases these interests diverge and conflicts result.... States have the constitutional power and responsibi- lity to implement governmental structures in urban areas to permit resolution of critical areawide issues on which adjacent govern- mental units cannot agree.... States also have the power to manage directly programs to meet many urban area issues .1/ The traditional state mandate in the development policy area has also been strengthened by the endorsement contained in the Carter ad- ministration's 1978 urban policy, which urged states to become partners 1/ White House Conference on Balanced National Growth and Economic Development, Final Report (Washington: USGPO, July 1978), p. 85. 1 - in a national effort to solve urban problems. Additional interest in the state urban policy role has been generated by a number of federally funded planning grants and research studies which have sought to docu- ment emerging state initiatives in local economic development and explore possible avenues for further state intervention. New attention to state development roles can also be attributed to growing consternation at the use of some state economic development tools. For example, the liberal use of state tax incentives to lure new industry from other jurisdictions is increasingly viewed as a costly competitive sport with few winners. When the incentive produces its intended result, the sponsoring state gains a new industry — gener- ally at the expense of its neighbor. When unsuccessful, the state gives away precious tax dollars to an industry that would have located within its boundaries anyway. Even when incentives work, the diffi- culty of calculating their costs and benefits adds to the growing disenchantment with their use. Perhaps most important, interest in the subject of state inter- vention in local economies derives from a growing perception that sub- stantial benefits may be gained from heightened state involvement in urban economic development. As one Carter administration official wrote in 1973: For the first time, the federal government has accepted the im- portance of state tax and governance policies for the well-being of cities. State law determines, for example, whether or not a city can expand its political boundaries to coincide with the reality of its economic region. States can redistribute local costs or local taxes to reflect differences of taxable wealth among jurisdictions. State investment policies can favor or dis- favor new or old communities. That has... until now remained terra incognita to federal urban policy planners. 2!/ Despite this surge of interest, little concern or attention has been directed to the question of what an increased state role in eco- nomic development might mean for large cities. Simply put, are large cities likely to prosper or suffer as a result of heightened state involvement in local economies? To date, this question has been greeted by an unusual silence from city officials. Given the history of friction between states and cen- tral city governments on urban concerns, this absence of comment is a curious one. Inasmuch as state governments nationwide tend to be domi- nated by rural and suburban interests, state development policies are likely to be shaped with only limited concern for the needs of large, 2/ Larry Houstoun, "Urban Policy: What Else is New?", Urban Land , July-August, 1978, p. 6. -2- urban governments, if large cities fail to speak out about the impli- cations of emerging state roles. Perhaps the relative reticence of urban officials on state-local economic aid activities derives from the inability of large cities to keep pace with the rapidly changing state scene. Information on the emerging state development role has not been directed to local govern- ments, with the result that much of this material has bypassed city officials. Alternatively, some suggest it is not an information prob- lem from which this reticence is derived, rather it is skepticism — the logical result of many, many years of friction between central cities and their state governments. In any case, the nature of state intervention in urban economic development is changing. And while it may be too early to tell whether the risks of state involvement in local development policy are more threatening than the rewards are beneficial, there is surely a need to explore the subject from the perspective of central city interests. In order to provide such a perspective, Public Technology, Inc. (PTI) conducted a survey of economic development professionals in 23 large cities and urban counties to tap their views of state performance on central city development issues. A number of findings from the poll are illustrative of the changing nature of state development policy, and the need for improvement of state-city communication on urban economic development activities: • Eighty-three percent of the survey respondents felt that the economic development policies and programs undertaken by their state had historically favored suburbs, small towns, or rural areas and continued to display such an emphasis today. Roughly two-thirds of the officials in this group, however, believe that the state's economic development activities are beginning to reflect a greater sensitivity to central city concerns. e While over four-fifths of the urban government officials said they would favor a heightened state role in the urban economic development sphere, this support tended to be highly conditional, Sixty-five percent of the poll respondents would welcome an ex- pansion of the state activity on urban economic problems only to the extent that the state directed its efforts toward strength- ening the locational advantages of the central city and enhanc- ing the self-help capabilities of urban jurisdictions. • Over three-quarters of the respondents characterized the infor- mation they received on state urban economic development actions as infrequent or sparse. Sixty-five percent of the respondents rated the quality of information they received on state urban economic development efforts as fair, inadequate, or poor. -3- As these perceptions indicate, the nature of state involvement in urban development matters, and the relationship between states and central city jurisdictions are changing. The goal of this bulletin, then, is to provide the local practitioner with information on recent state economic development activities, and to explore the limits and potentials of state power vis-a-vis the urban economy. The implica- tions of these developments for large, urban jursidictions are given particular emphasis. The text is organized as follows: Chapter II catalogs the possi- ble avenues of state intervention in economic development. This dis- cussion is intended to inform the local practitioner of the range of powers and resources available to the states in remedying urban eco- nomic distress. While pointing to possible future directions for state intervention, the implicit goal of this section is to offer cities a catalog of the avenues open to state intervention in local economies. As with any catalog, this section need not be read from "A" to "Z". Chapter III discusses issues of importance to large cities rela- tive to emerging state development roles. These include the merits of "targeted" state development strategies as opposed to "balanced growth" approaches; the costs and benefits of state aid to the private sector; the desirability of heightened state intervention in central city eco- nomic policy; and the appropriate role for urban governments to play in the design and oversight of state development programs. Chapter IV briefly characterizes the. current nature of state involvement in urban economic development, and highlights some of the more promising state actions to stimulate local growth. These range from regulatory and fiscal reforms, to aids for small businesses and community-based organizations to job training and site improvement programs. Chapter V identifies priority needs for further research on state development issues, while chapter VI lists published material and information contacts for use by researchers and practitioners. PTI ' s questionnaire on urban officials' views on state economic development efforts is reproduced in the appendix to the text, as are a tabulation of survey responses and a listing of the cities and urban counties represented in the poll. -4- II. THE PARAMETERS OF STATE INTERVENTION IN URBAN ECONOMIES The pivotal role that state governments can play in influencing local economic development patterns derives from the traditional state fiscal, regulatory and expenditure perogatives, as well as the state's authority to determine the extent of local powers. In exploring the potential importance of state government in the development process, urban officials should be aware of the multiple avenues of intervention available to state policymakers. The actions which states can under- take to influence the nature and extent of local economic change include altering the state fiscal system to raise and distribute revenues more efficiently and equitably; modifying state regulatory roles to promote business expansion; exerting expenditure perogatives to stimulate local economic growth; and delegating local authority, where appropriate, to address economic problems at the community level. These possible state actions are discussed in detail below. The chap- ter concludes with a presentation of the constitutional fiscal and political constraints which limit the states in designing and executing economic development programs. The authors would like to remind the conscientious reader that this section of the paper is a catalog. It is straightforward, lengthy and intended to be a resource for local officials; it does not require word-for-word reading. State Fiscal Roles A. Constructing an Effective Fiscal System The development of an effective state fiscal system represents a prerequisite to positive state intervention in local economic develop- ment problems. An effective state-local fiscal system should be income elastic and progressive, and should discourage sharp interstate and interlocal tax level disparities. All of these features have important implications for urban economic development. Income elastic and pro- gressive tax structures are more fair and less unpopular (and thus less vulnerable to political sway) than the property tax or other regressive taxes. Tax systems which discourage interjurisdictional tax level disparities can help to prevent the movement of income-producing firms and more affluent households from areas with high tax levels to neigh- boring areas with low ones. Generally, such tax-induced migration works to the detriment of poorer urban areas with high tax rates, while favoring prosperous, less-urbanized jurisdictions with lower levels of taxation. According to the Advisory Commission on Intergovernmental Rela- tions (ACIR), state systems are becoming increasingly income elastic and progressive: • The states are relying more heavily on personal income and general sales taxes, which are more income elastic than pro- perty taxes and limited user fees. During 1979, 37 states -5- EXHIBIT I POSSSIBLE AVENUES OF STATE INTERVENTION IN URBAN ECONOMIES A CHECKLIST FOR LOCAL OFFICIALS FISCAL REFORMS State Tax Structure Revisions • General Sales Tax • Graduated Personal Income Tax • Reduction of Interstate and Interlocal Tax Level Disparities State Revenue Sharing/Tax Sharing Program • Aid Formula Based on Local Fiscal Need Education Finance Reform • State Assumption of Primary and Secondary School Costs • Aid Formula Based on Local Fiscal or Socio-Economic Need State Assumption of Local Social Service Costs • Public Welfare Expenditures • Health Care Expenditures Reimbursement of Local Governments for Local Expenditures Required by the State Enabling Statute Permitting Metropolitan Revenue and Tax Base Sharing Programs REGULATORY REFORMS Banking • Elimination of Usury Ceilings on Commercial Lending • Limitation of Commercial Bank Reserve Requirements • Revision of Chartering and Branching Regulations for Commercial Banks Insurance • Enactment or Extension of FAIR Plan Legislation • Regulation of Insurance Rates and Territories to Ensure Equit- able Coverage • Investigation of Discriminatory Practices in Insurance Industry Environment, Air Quality, and Land Use • Enactment of Regulations Which Maintain Appropriate Balance Between Environmental and Economic Development Concerns Permit Procedures and Requirements • One-stop Permitting Program • Office of Business Advocacy • Forms Management/Paperwork Reduction Program -6- DETERMINATION OF LOCAL POWERS Local Taxing Authority • Sales Tax • Income Tax • Tax Incentive Financing Local Borrowing Authority • Improve Local Access to the Bond Market Through: - Controls on Local Bond Maturities, Interest Rates, Methods of Sale - State Loan Guarantee Fund for Municipal Debt Local Development Powers • Localities Authorized to Create Economic Development Corporations • Localities Authorized to Create Special Purpose Districts Local Functional Discretion • Localities Able to Exercise All Powers Not Specifically Denied Them by the State STATE EXPENDITURE POLICIES State Procurement Policy • Procurement Set-asides for Small Businesses • Procurement Set-asides for Firms Located in Economically Lagging Jurisdictions State Facilities Siting Policy • Location of State Facilities in Economically Lagging Jurisdic- tions State Credit Policy • Linked Deposit Plan Investment of State Pension Funds • Investment Strategy Facilitating Urban Economic Development Development Grants • Infrastructure Development Policy Placing Improvements to Facil- itate Urban Economic Development STATE AIDS TO THE PRIVATE SECTOR • Venture/Equity Capital Investment Program • Business Loans/Loan Guarantees/Interest Rate Reduction Efforts • Industrial Revenue Bonds (state and local issuances) • Tax Abatement Programs (state and local efforts) • Business Site Development Program • Customized Job Training Aids to the Private Sector May be Targeted on the Basis of: - Location of Firm - Size of Firm - Sector of the Economy to Which the Firm Belongs -7- made use of both the personal income tax and the general sales tax, as compared to only 19 states in 1960.1/ 4 • States are amending their personal income tax structures for a slight increase in progressivity nationwide. At the same time, the regressivity of state property and sales taxes is being tempered by the increasing use of state-financed circuit break- ers, which limit the taxes paid by lower-income and elderly households, and by the enactment of income tax credits. 2/ State governments also are becoming increasingly attentive to the possible impact of tax level disparities on household and indus- trial movement. Such disparities can occur at both the state and local levels, causing both intra and interstate movement. While the bulk of the available evidence indicates that interstate tax differentials have only a negligible effect on industrial movement, several states with particularly high tax levels appear susceptible to tax competition from their immediate neighbors. Recent research suggests that New York and Massachusetts have lost population and industry to adjacent states for this reason. 3/ Under such circumstances, state action is necessary to bring tax levels into line with those in adjacent jurisdictions. Accordingly, New York State has embarked upon a general tax reduction effort, in order to enhance the state's climate for economic develop- ment .4/ It is important to note, however, that the effect of state taxes on the locational decisions of businesses is not precisely known, and according to some, it is grossly overstated. In fact, state taxes on business income, property and inventory account for a very small por- tion of total business costs, and this is further neutralized by Federal tax deductions for state and local taxes. 5/ \J Advisory Commission on Intergovernmental Relations, Significant Features of Fiscal Federalism, 1978-1979 Edition , Report No. M-l 1 5 (Washington: USGPO, 1979), pp. 3, 51. (Hereinafter cited as Significant Features , 1978-1979 .) 2/ Ibid ., pp. 3; 38-39; 64-68; 74-75. 3/ Advisory Commission on Intergovernmental Relations, Interregional and Interstate Tax Competition , unpublished working paper, May 1979, p. 47. 4_/ Roy Bahl, The Impact of Local Tax Policy on Urban Economic Development (Washington: Urban Consortium, forthcoming) . 5/ Beldon H. Daniels, "The Mythology of Capital in Community Economic Development". Paper prepared for the National Urban Coalition, June 18, 1979. -8- While the impact of state taxes on business location may not be great, the impact of intra-state differentials from city to city (and city to suburb) is another case. Evidence suggests that movement away from the central cities has been exacerbated by the tax advantages offered by more affluent suburban jurisdictions, particularly for business properties. 6/ The effect of intra-state tax differentials is most significant where older, poorer communities lose businesses and the resultant tax burden and cost of doing business must be shouldered by fewer and fewer businesses. In sum, the state's ability to regulate local tax levels renders state action the most effective way to reduce interlocal disparities in tax rates. While it is unclear to what extent such differentials have actually affected the migration of population and industry between localities, it is clear that a state tax system should aim to be well balanced to discourage the possibility of harmful effects due to inter- local migration of households and firms. Also a strong state revenue raising system, characterized by the use of the general sales tax and the graduated personal income tax, is the prerequisite to effective state action to ameliorate local economies. B. State Fiscal Policies To Aid Needy Local Governments State governments can enact a variety of fiscal reforms to alle- viate local financial distress, thereby freeing local funds for revi- talization activities including economic development efforts. While such reforms are generally associated with attempts to aid declining central cities, they are equally pertinent to the needs of fiscally hard-pressed rural jurisdictions. The primary state-local fiscal aids include the following: Revenue Sharing and Tax Sharing Programs . To date, 49 states have enacted revenue and/or tax sharing programs which distribute surplus state monies to local governments. Of these, 11 states employ program distribution formulas which, on balance, exert a moderately equalizing impact on interlocal fiscal disparities. Most commonly, equalizing aid formulas rely on local population as the primary distribution criteri- on.^/ Less frequently enacted are formulas which directly redistribute state monies to communities with the most limited taxing capabilities; 6/ Roger J. Vaughan, State Taxation and Economic Development (Washington: Council of State Planning Agencies, 1979) , p . 86. 7/ Advisory Commission on Intergovernmental Relations and National Academy of Public Administration, The States and Distressed Communities: Indicators of Significant Actions (Washington: National Academy of Public Administration, 1979), pp. 29-30. (Hereinafter cited as ACIR/NAPA.) -9- indeed, 29 states return the bulk of their revenue and/or tax sharing dollars in direct proportion to local source of orgin or local property taxes raised. 8/ Thus, modification of revenue and tax sharing formulas would appear to be a significant reform in those states whose aid efforts perpetuate fiscal inequalities between local governments. Education Finance Reform . The state influence on the financing of elementary and secondary education has grown substantially during the past 20 years. Patterns of state education finance aid can exert a significant impact on local fiscal conditions. Education finance for- mulas which distribute revenues on the basis of student economic or educational disadvantage can direct revenues to jurisdictions with high concentrations of needy households. Twenty states have built such fac- tors into their education finance plans. Population sparsity and density criteria can also be employed to channel state school finance funds to needy urban and rural communities To date, 21 states have used this device to channel additional monies to school districts with high per pupil costs. While population den- sity formulas have tended to assist sparsely settled rural areas, they can also be employed to aid thickly populated urban districts .9/ The most effective action that states could take to equalize local education finance capabilities would be the assumption of all primary and secondary school costs. At present, Hawaii is the only state which completely finances local education expenditures . 10/ State Assumption of Local Social Service Expenditures . Social service expenditures, particularly in the health and welfare fields, represent a fiscal drain on localities with high concentrations of poor households. Vaughan points out that federalization of health and wel- fare programs represents the most efficient and equitable way to alle- viate local burdens in these policy areas .11/ Absent federal action, however, state intervention can reduce costly local social service expenditures . According to ACIR, the states have made impressive progress in reducing local service costs. During 1977, state governments financed 78.9 percent of state-local public welfare expenditures and over half of total state-local health care and hospital outlays .12/ By 1979, 30 states had assumed 90 percent or more of local public welfare costs, and more state governments were beginning to assume responsibility for all non-federal Medicaid expenditures . 13/ 8/ Ibid., pp„ 29-30. 1! Ibid -> PP- 30-31. 10/ Ibid., p. 30. 11/ Vaughan, op_. cit . , pp. 66-68. 12/ Significant Features , 1978-79, op. cit ., pp. 20-29. 13/ ACIR/NAPA, op. cit., p. 31. -10- Reimbursement of Local Governments for Local Expenditures Required by the State . Often, state statutory and administrative requirements impose additional costs on local governments. Of late, "the financial stress being felt at all levels of government has prompted many local officials to call for state reimbursement of local governments for expenditures mandated by the state."14/ Recent findings suggest that these costs are more likely to occur in the areas of solid waste dis- posal, education, local employee compensation, and local retirement plans . 15/ By mid-1979, 16 states had enacted legislation that would reim- burse local governments for state-imposed costs. Most of the new enactments allowed reimbursement on a statute-by-statute basis, or con- fined reimbursement to limited program areas. California, however, reimburses local jurisdictions for "local costs that result from state- mandated programs, increased service levels, and costs previously incurred at local option that have been subsequently mandated by the state. "16/ State reimbursement of local officials for state-imposed costs appears to be a fruitful area for further legislative reform, which should heighten state sensitivity to local budgetary constraints. In a related development, a number of states are beginning to require legis- lative review of the local fiscal impacts associated with proposed state enactments. Metropolitan Revenue and Tax Base Sharing . Many intergovernmental affairs analysts advocate the creation of metropolitan taxing and ser- vice districts to enhance economies of scale in public service delivery as well as to eradicate central city/suburban fiscal disparities. State authorization is required to create such districts. As Vaughan notes, "progress in.... these areas have been slow and the prospects for swift action are not bright, "17/ largely due to sub- burban opposition to such reforms. Interlocal tax base sharing, how- ever, has been implemented throughout the Minneapolis/St. Paul metro- politan area in an effort to equalize community revenue raising capa- bilities. Program results reportedly have been mixed. 18/ More recent- ly, Oregon voters approved the creation of a three-county metropolitan IhJ Ibid ., p. 33. 15/ Ibid ., p. 33 16/ Ibid., p. 34. 17 / Vaughan, op. cit . , p. 68. 18 / See, for example, Katherine C. Lyall, Tax Base Sharing: A Fiscal Aid Towards More Rational Land Use Planning (Baltimore: Johns Hopkins, 1975) ; and Margaret Sims, Metropolitan Tax Base Sharing: Is it the Solution to Municipal Fiscal Policy ? (Washington: The Urban Institute, 1977). -11- service district in the Portland region. The district is now limited to a regional coordinating role, but could assume more substantial tax- ing and program development powers upon voter approval . 19/ The development of authorizing legislation for the creation of metropolitan revenue raising districts, then, is another action that states might take to alleviate local fiscal inequalities. State Regulatory Roles A second prominent avenue of state intervention into local eco- nomic development is through the regulation of private industry. By setting the contours of permissible development activity, state govern- ments can establish the climate for local economic growth. Below we describe several particularly important fields in which state regula- tory authority can affect the pace and structure of development. These include: banking; insurance; environmental, air quality and land use requirements; and permit procedures and regulations. A. Banking Commercial banking practices within the United States are con- trolled through a dual system of state and Federal regulation. Nation- ally chartered commercial banks are regulated by a number of Federal agencies, including the Comptroller of the Currency, the Federal Depo- sit Insurance Corporation and the Federal Reserve Board. By contrast, state-chartered institutions are regulated by state-established banking commissions . State regulation of commercial banking institutions can affect substantially the availability of business financing. As of June 1979, approximately 68 percent of U.S. commercial banks were state-chartered, and therefore subject to state regulatory controls. The elements of banking practice that can be regulated by state governments include loan interest rates reserves requirements, and standards governing chartering and branching. The state's ability to regulate the branch- ing of commercial institutions is particularly significant, in that both nationally-chartered and state-chartered commercial banks are subject to state branching controls. State-imposed reserve requirements and usury rates have important implications for economic development in that these controls largely determine the supply of funds for business lending. Regulations that increase the supply of loanable funds assist small, newly-established or high-risk firms which otherwise would be closed out of the market for commercial credit. Thus, city officials desirous of assisting small, young or risky urban businesses would be well advised to support 19/ Vaughan, op. cit . pp. 66-68 -12- the enactment of banking regulations designed to expand commercial loan supplies, including limitations on overly-restrictive reserve require- ments, and the abrogation of usury ceilings for business lending. Reserve Requirements. The limitation of reserve requirements for commercial banks, within the dictates of fiduciary responsibility, would increase the amounts available for business loans. For the most part, state banking regulations have tended in this direction, with state-chartered institutions generally required to hold fewer reserves than do comparable nationally-chartered commercial banks. (ironically, this reform has perhaps worked too well. The stringency of federally- imposed reserve requirements relative to state standards has led in- creasing numbers of commercial banks to opt out of the national banking system and obtain state charters. Federal consternation at this devel- opment has generated interest in the imposition of a single, federally- set reserve standard that would pre-empt state regulations.) The Regulation of Usury Ceilings . While state-set reserve require- ments tend to assist risky, new or small firms, state-imposed usury ceilings do not. Originally established to ensure affordable supplies of business credit, interest rate ceilings artificially reduce the cost of loan funds, thereby creating a shortfall in loan supply relative to demand. If the market interest rate surpasses the state-set ceiling, supplies of loan capital may dry up entirely. The deleterious effects of usury ceilings, moreover, are borne disproportionately by small, recently-established, or higher-risk enterprises, as banks tend to ration credit in the face of usury limits by increasing collateral requirements, restricting loans to long-term customers, or reducing the riskiness of the loans they do make. While there has been a discern- ible movement toward the amendment of state usury statutes to raise loan interest rates to market levels, state-imposed ceilings remain widespread. In 1979, 32 states imposed flat rate interest ceilings on loans to unincorporated businesses, with the usury level generally set in the 10-18 percent range. In the case of corporations, 17 states levied such restrictions, with interest rate caps most commonly at the 12-18 percent level. 20/ State governments, however, now face an unprecedented opportunity to reexamine and revise their usury laws. Pursuant to 1979 Federal legislation, state-set ceilings on business loans have been pre-empted, in most cases, until July 1980. A new, federally-established interest rate floor, pegged at 3% above the Federal Reserve discount rate, will prevail during the interval. The preemption period is intended to induce state governments to reconsider the effects of current usury statutes, and to revise them when warranted. Local officials might 20 / Material supplied by Harley T. Duncan, Office of State Services, National Governors' Association, Washington, D.C. -13- wish to take advantage of this situation to support the enactment of legislation pegging usury ceilings to market rates of interest, or abandoning interest rate restrictions entirely. Chartering and Branching Regulations . States might also attempt to maximize loan supplies for underfunded urban and rural businesses by revising the chartering and branching regulations whch govern commer- cial banks. Empirical studies, for example, suggest that business lending will increase in isolated, rural areas where unit banking pre- vails, if state chartering requirements are amended to encourage the entry of new banks. In such cases, the ensuing growth in banking com- petition appears to stimulate additional commercial lending activity, and encourages financial institutions to assume higher levels of portfolio risk. 21/ The Federal Community Reinvestment Act (CRA) provides another model for state intervention in the banking industry. Under CRA pro- visions, federally-regulated lenders must supply annual documentation of services provided within an institution's local community. Inade- quate levels of community lending may lead to a denial of branching requests. While CRA has been most frequently employed to monitor the extent of home improvement and mortgage finance activities in urban neighborhoods, the measure also requires disclosure of commercial lending activity. Enactment of similar state statutes, tying the branching requests of commercial banks to business lending performance in the surrounding community, could increase the responsiveness of financial institutions to the concerns of central city businesses. Such statutes could be particularly powerful, as state branching regulations apply to both nationally-chartered and state-chartered commercial banks. B. Insurance Access to adequate insurance coverage is crucial to the viability of local business enterprises. Comprehensive insurance coverage is often the prerequisite to a firm's receipt of mortgage or commercial loans. During the past several years evidence has mounted to suggest that urban businesses, particularly those located in declining neigh- borhoods, are systematically denied access to reasonably priced insur- ance coverage. The existence of such "insurance redlining" has threat- ened the stability of the small enterprises which constitute the econo- mic base of most central cities. 22/ 21/ See Belden Daniels and Michael Kieschnick s Theory and Practice in the Des ign of Development Finance Innovations (Washington: Council of State Planning Agencies, 1978), po . 57-74; 22/ Ted Miller, The Impact of Insurance Indu stry Practices o n Urban Neighborhoods (Washington: Urban Consortium, Forthcoming). •14- The regulation of the insurance industry is fully reserved to state governments. Thus, the state represents a primary actor in ensuring that urban businesses receive adequate insurance coverage. Actions that state insurance commissions can undertake to improve the availability of insurance include: • holding hearings on and ordering change in insurance rates and territories; • investigating the validity of risk data and procedures used to determine premium amounts; • documenting claims of redlining or discrimination; and • enacting or extending Fair Access to Insurance Requirements (FAIR Plan) legislation to ensure coverage of certain high-risk groups .23/ C . Environmental, Water, Air Quality and Land Use Requirements Environmental, water and air quality standards affect the output and productivity of firms, while land use regulations modify both the location and tempo of economic growth. In the area of land use, state government represents the primary regulatory authority. The state can, for instance, provide uniform guidelines and regulations for such things as building code enforcement, agricultural preservation poli- cies, and local planning requirements. Elements of state control may, however, be ceded to local units. In the environmental arena, the Federal Government is the decisive actor in the development of air and water quality regulations. The role of the state, however, is expanding in a way which may greatly influence local economic development. Recently enacted Clean Air Act Amendments of 1977 authorize the Environmental Protection Agency (EPA) to set up a regulatory structure to mobilize the country to meet strin- gent air quality standards by 1982. Regulations require each State to submit to EPA a plan which defines how the state will achieve and meet federal standards for air quality. The plans, called State Implementa- tion Plans (SIP) have an implicit effect on growth, land use and indus- trial employment patterns within the state since they require states to impose strict controls on the level of air pollution in specific geo- graphic areas across the state. While the controls do not necessarily prohibit economic growth within the state, they require absolute limi- tations on the growth of emissions — particularly in "non-attainment areas" which are in violation of National Ambient Air Quality Stan- dards. Obviously, state controls may affect a city's competitive posi- tion within the state to attract or retain employment and industries. Thus, it is critically important for cities to be involved in the development of the SIPs. Although the provisions of the 1977 amend- ments neglect to provide cities with planning resources for this 23/ Ibid., part IV. -15- activity, they do encourage and require the participation of cities in the development of the state plans. Cities should understand the re- quirements of the law and work closely with their states to achieve fair, balanced and rational State Implementation Plans. (Los Angeles and New Orleans are models of extensive city involvement in designing state plans.) Tn this context, the appropriate state role would seem to be the maintenance of an equitable balance between environmental preservation concerns and economic development goals. D. Permit Procedures and Requirements According to one group of analysts, "state regulatory policy can play a useful role in promoting economic activity. But, ironically, it is often the streamlining of permit procedures and requirements which has the greatest positive impact on economic growth. "24/ Thus, a number of states have instituted procedures designed to reduce the bureaucratic requirements affecting business expansion. Such proce- dures include the development of "one-stop" shops for regulatory per- mits, the reduction of state-imposed paperwork requirements, and the establishment of state offices to assist industry in meeting state regulatory standards. 25/ State Delegation of Local Powers and Responsibilities The state's ability to delineate the scope of local financial powers and functional responsibilities has a direct impact on local economic development capabilities. By regulating local taxing and debt issuance, the state determines the amount of locally-raised revenues available for development projects. Similarly, state law defines the types of development agencies that may be created at the local level, as well as the extent of their powers. Several of the more important •asoects of the state's ability to structure the local economic develop- ment role are discussed below. A. Local Taxing Authority State statute determines the potential efficiency of local revenue raising systems. As noted previously, sales and income taxes tap in- come growth more effectively than does the property tax. Accordingly, local fiscal capabilities are enhanced by a broadening of the local tax base to permit the use of sales or income levies. ACIR reports a general trend in this direction: 24 / Neal R. Peirce, Jerry Hagstrom, and Carol Steinbach, Economic Development: The Challenge of the 1980s (Washington: Council of State Planning Agencies, 1979) , pp~! 11-12. (Hereinafter cited as Peirce.) 25/ Ibid., pp. 13-14, 41-42 -16- ...thirty-six states now permit their local jurisdiction to levy either sales or income taxes... The sales tax is more frequently employed on the local level. Thirty- one states have enabled their local governments to enact sales taxes; generally, the tax is available to all local units of general purpose government throughout the state.... At present, 14 states permit local governments to levy income taxes.... Generally, the use of such authority has been restricted to cities and counties with populations of 50,000 or more. A notable exception is Pennsylvania, where some 3,500 local units levy income taxes, including over 1,000 school districts. Similarly, at least 365 Ohio cities and villages with populations of less than 50,000 have imposed local income tax levies .26/ States may also enhance local devlopment capabilities by enabling communities to employ tax increment financing. The practice permits local units to issue revenue bonds for redevelopment projects on the expectation of repayment from project-derived tax receipts. As re- ported by the National Council for Urban Economic Development (CUED) some analysts cite the following as benefits which flow to local gov- ernments as a result of tax increment financing: • The locality loses no taxes for bond financing prior to the project. • Property owners outside the project area do not pay any addi- tional taxes to finance the project. • The locality's ability to finance redevelopment expands without increasing levels of general obligation debt. • Upon retirement of the bonds, property taxes previously allo- cated to paying off project costs are returned to the full tax base of the community for its entire benefit. 27/ States which have enacted legislation to permit the local use of tax increment financing include California, Colorado, Connecticut, Iowa, Minnesota, Montana, South Dakota and Wisconsin. 28/ 26/ ACIR/NAPA, op. c_it_. , p. 32. 27 / National Council for Urban Economic Development, State Actions to Stimulate Development: A Catalog (Washington: National Council for Urban Economic Development, working draft, forthcoming), p. 73, (Hereinafter cited as CUED.) 28 / Ibid., loc . , cit., and Advisory Commission on Intergovernmental Relations, State Community Assistance Initiatives: Innovations of the Late 70s , Report No. M-116 (Washington: USGPO, 1979). (Here- after cited as ACIR). -17- B. Local Borrowing Authority State governments can affect the pace of local economic develop- ment by regulating municipal issuances of long-term, general obligation debt, a financing method commonly used to fund community infrastructure improvements. A recent report by the research arm of the Municipal Finance Officers Association (MFOA) summarizes the long-standing nature of state concern in this area: Historically, (local) borrowing decisions have been viewed as particularly important (by the state) because repayment schedules represent long-term commitments of future revenues. The fear always exists that a local jurisdiction might overcommit itself and default on its repayment of debt, thereby impairing the efforts of other local units in the state and perhaps the state itself, to obtain capital. This concern, plus the growing com- plexity of the (bond) market and its financing arrangements, has prompted state policy makers to seek stronger controls over local debt. 29/ According to an MFOA nine-state review, state regulations to assure the soundness of local general obligation borrowing include con- trols on bond maturities, interest rates and methods of sales. States commonly impose ceilings on local indebtedness, generally expressed as a percentage of the value of taxable real property in the jurisdiction. Political controls, including local referenda and state legislative review, also may be required to assure prior public approval of muni- cipal bond issues. 30/ State governments are also beginning to take affirmative action to improve local access to the public credit market. MFOA reports that Minnesota has created a state loan guarantee fund, which is available to local governments to help them market their debt. In return, the local jurisdiction must return two percent of the issue's proceeds to the state. Similarly, New Jersey has instituted a Qualified Bond Program, which pledges state monies to amortize certain local bond issues in economically depressed areas. 31/ 29 / John E. Petersen, C. Wayne Stallings and Catherine Lavigne Spain, State Roles in Local Government Financial Management: A Comparative Analysis (Washington Municipal Finance Officers Association, Government Finance Research Center, June 1979), p. 37 30 / Ibid . , p. 38. 31/ Ibid., p. 40. ■18- MFOA notes that increased state controls on local debt issuance are often opposed by local interest groups .32/ Still, it should be noted that state controls tend to improve the market ratings on local debt, resulting in significant aggregate savings in interest costs. The local ability to float revenue debt, moreover, affords municipal governments considerable flexibility in the face of state restrictions on general obligation borrowing. C. Local Ability To Create Economic Development Authorities State enabling legislation defines the structure and powers of locally constituted economic development bodies. The power to regulate local governments in this fashion represents one of the most important ways in which states can affect local development activities. The local economic development organs which can be authorized by the state include the following: Economic Development Corporations . Economic development corpora- tions (EDCs)aTequasi-^ublicr^development authorities serving local jurisdictions. Although they operate as private, non-profit corpora- tions and enjoy considerable administrative autonomy, EDCs are char- tered by local governments and retain a certain degree of public accountability. Financing tools employed by EDCs range from the ability to make loans and equity investments to eminent domain, taxing and bonding powers. The mix of powers available to an EDC is predicted on the relevant state and local enabling statutes. 33/ Special Purpose Districts . Special purpose districts are limited- purpose governing bodies organized to focus service delivery or devel- opment activities within geographic areas that may be smaller or larger or may overlap more than one political jurisdiction. 34/ Like EDCs, special purpose districts enjoy independent financing powers including the abilities to levy taxes and user fees and to issue bonds. The functions of special purpose districts may include site acquisition and clearance; the provision of infrastructure improvements, including transportation facilities and water and sewer services; and the con- struction of commercial centers. 35/ The creation of special purpose districts renders several benefits to local jurisdictions. First, creation of such authorities expands development financing capabilities at the local level, inasmuch as special purpose districts are not subject to local debt limitations. Second, the provision of improvements on a specialized basis minimizes 32/ Ibid ., p. 42. 33 / CUED, op. cit ., pp. 64-65. 34/ Ibid ., p. 63. 35/ Ibid., p. 67-68. -19- spillover effects: public benefits accrue to the jurisdictions which finance them. Third, the creation of special purpose authorities enables the realization of economies of scale in public service deliv- ery, particularly in the case of regional improvements. On the other hand, the proliferation of special purpose bodies has been cited as a cause of a growing fragmentation of local decision-making authority, as well as a loss of political accountability at the municipal level. D. Local Functional Discretion State governments can enhance local abilities to address economic development and decline issues through the passage of residual powers statutes or constitutional amendments. Such enactments permit local units to exercise all powers not explicitly denied them by the state. In the absence of such statutes, as ACIR points out: ...local governments... (are) constrained in their functional capabilities, their structural options, and their fiscal resources by the application of Dillon's rule— the traditional legal principle which holds that local governments have only those powers specifically delegated by the state. 36/ Twenty-two states, however, have enacted residual powers statutes to maximize the decision-making of their constituent units. 37/ Employing State Expenditures To Affect Local Development Opportunities The nature, magnitude and location of state expenditures can exert a powerful influence on local economic development opportunities. As urban economist Belden Daniels notes: The immediate impact of state expenditures is the jobs and incomes directly created, along with the multiplier effect of this increase in economic activity .. .Although those employed by state spending account for only 4 percent of employment nationwide, the most important influence of the state budget on economic develop- ment comes through the goods and services provided by expendi- tures, many of which, of course, touch the operation of private firms. 38/ The elements of state expenditure policy that may be employed to assist declining or underdeveloped areas include the following: A. State Procurement Policy State governments can alter their procurement strategies to accord preferential treatment to small businesses, or to businesses located in 36/ ACIR/NAPA, op. ci£. , pp. iv, 25, 42 37/ Ibid ., pp. 67-68. 38/ Quoted in Peirce, op. cit . , p. 12. •20- certain geographic areas. According to the U.S. Small Business Admin- istration, 15 states offered procurement set-asides for small firms during 1978. One state, Illinois, has targeted its small business procurement effort to firms located in areas experiencing high levels of joblessness .39/ Model state legislation which suggests the estab- lishment of state procurement set-asides for firms located in economi- cally lagging jurisdictions has been prepared by ACIR.40/ B. The Siting of State Facilities The siting of state office buildings, medical facilities or uni- versity complexes in depressed communities could generate direct eco- nomic activity, as well as stimulate additional private sector develop- ment by creating a demand for ancillary services. Recent survey data indicate that state preferential siting efforts have been few, but are growing in number; at least nine states have undertaken activities of this sort. 41/ The most prominent example is that of Massachusetts. Pursuant to the urban strategy developed by former Governor Michael Dukakis, the state "revised regulations governing the location of state offices and facilities in order to emphasize their placement or expansion in urban centers . "42/ C. State Credit Policy State governments could attempt to influence private development finance through the preferential placement of state cash deposits. Under linked deposit strategies of this sort, states deposit idle cash reserves in lending institutions which agree to undertake certain levels of development finance activity in depressed areas. The efficiency of linked deposit plans, however, has been challenged by cash management analysts. First, implementation of such plans could result in significant losses in interest income to sponsor- ing governments. Second, linked deposit plans may merely provide in- direct subsidies for development loans which would have been made in any case, an inefficient use of public funds. Accordingly, some finan- cial analysts have suggested that states would be best advised to seek the highest rate of return on idle funds, and to provide development assistance through more direct expenditures. To date, only a handful of states have instituted linked deposit plans. The result of these programs reportedly have been mixed. 43/ 39/ ACIR/NAPA, op. cit_. , p. 21. 40 / For a summary description, see ACIR, op. cit ♦ , p. 43 41/ For a partial listing, see ACIR/NAPA,~op. cit ., p. 26; according to PTI's survey data, Pennsylvania, Indiana, Ohio and New York are among the other states which have undertaken this practice. 42 / Ibid . , loc . cit . 43 / See, for example, ACIR, op. cit . , pp. 25-26. -21- D. The Investment of State Pension Funds The assets controlled by state public employee pension funds are of considerable magnitude, and represent a possible source of invest- ment capital for local economic development activities. According to some authorities, the targeting of state-administered public pension funds can be used to provide: • housing mortgages to low- and moderate-income households; • loan and/or mortgage insurance to small and minority business enterprises ; • mortgages or higher-risk loans to commercial or industrial commercial or industrial ventures in blighted or deteriorating urban areas; and • equity or venture investments to strengthen local economies .44/ The managers of public pension funds, of course, must select investments which do not compromise the security of pension assets. Still, fund managers can select within-state investment opportunities which positively affect local economies, provide desirable rates of return, and still meet their fiduciary responsibilities. As a safe- guard, higher-risk investments might be restricted to projects which are backed by either federal or private sector guarantees .45/ An example of such an arrangement is investment in a Small Business In- vestment Company, created from part of the retirement fund combined with private capital and SBA loans and guarantees. States which have begun to invest pension assets in order to further local economic development goals include California, Hawaii and Kansas .46/ E . Direct Development Grants The most direct way in which states can influence local economic development is through the targeting of development expenditures to underdeveloped or declining communities. Funds that can be used in this fashion include monies for school construction, water and sewer development, highway and transit aid, and industrial siting. Massachusetts was one of the first states to institute a targeted state expenditure policy. As Peirce, Hagstrom and Steinbach described the effort, 44/As reported to CUED, op. cit ., p. 97 45/ Ibid ., p. 98. 46/ Ibid., p. 99. -22- ...the state... shifted sewer assistance programs to favor densely settled areas... (and) diverted state and federal highway funds from new projects in the open countryside to bricking sidewalks and improving city roads. After a heated battle with the educa- tion bureaucracy, state school building assistance policy was shifted to favor rehabilitation of schools in center cities rather than abandoning the old structures and forcing cities to build afresh on their outskirts. Three-quarters of the federal park money flowing into the state was directed to major urban centers, almost twice as much as they had received before .47/ Targeted expenditure policies on the order of the Massachusetts effort, however, are the exception rather than the rule. While eigh- teen states target certain infrastructure improvement aids to declining or underdeveloped communities, these efforts tend to be "fragmentary, often representing a matching contribution on behalf of certain local- ities for additional federal assistance." Generally, state-local in- frastructure development grants are not targeted, but "are ... available on a statewide basis, in fixed ratio to local development expendi- tures."^/ Constraints on State Roles The foregoing sections have outlined the rich variety of actions that state governments might undertake to influence community economic growth. As these sections illustrate, the states enjoy considerable latitude in shaping local economic assistance activities. Regardless of the merits and implications of these approaches, it should be noted that the states face a variety of constraints in attempting to design and implement economic development efforts. These constraints, which are discussed below, could alter significantly the scope and nature of state intervention in local economies. A. Constitutional Constraints Constitutional limitations on state powers can restrict the scope of state economic development programs. Two classes of state constitu- tional provisions, those defining equal protection and public purpose requirements, have particularly important implications for economic policy development. Equal protection requirements are intended to ensure the equitable treatment of individuals in like circumstance under state law. Strict judicial interpretation of such requirements, however, can impede state 47 / Pierce, £p_. cit . , p. 31. 48/ ACIR/NAPA, op. cit., p. 31 -23- efforts to target economic development incentives. For example, a 1978 Wisconsin statute designed to target home rehabilitation tax credits to blighted areas was invalidated by the courts on the grounds that the statute discriminated among substantially similar classes of property owners .49/ Thus, constitutional provisions to assure equal protection may restrict state efforts to promote economic development by confer- ring benefits on individuals residing in locations requiring upgrading. Constitutional requirements defining the acceptable uses of public debt can also affect state economic development capabilities. Histor- ically, state and local credit has been reserved for projects serving certain public purposes, and withheld from ventures which confer sub- stantial benefits on private interests. Thus, public efforts to stimu- late economic growth through the financing of private industrial sites and facilities are generally subjected to judicial scrutiny on public purpose grounds. While the acceptable uses of public debt have expand- ed considerably over the past decade, increasing state emphasis on pub- lic/private cooperation and on the leveraging of public development funds have brought the ambiguities surrounding public purpose require- ments into sharp relief. Recent research indicates that the implemen- tation of a number of state-local development projects nationwide has been delayed or prevented because of public purpose suits testing the constitutionality of the underlying enabling statutes. 50/ In this con- text, ACIR has proposed a model constitutional amendment permitting the extension of state and local credit to members of the private sector engaged in economic and community development activities . 51/ B. Fiscal Constraints A growing body of evidence suggests that fiscal constraints are likely to represent a barrier to the continued expansion of state-local development expenditures. The following factors are expected to con- tribute to the growth of fiscal stress at the state level: Increasing vulnerability to economic downturns . The heightened state reliance on sales and income taxes has generally strengthened the fiscal position of state governments. Still, the growing income elas- ticity of state revenue raising systems has rendered state governments more vulnerable to cyclical downturns in the national economy. 52/ The increasing state susceptibility to recessionary pressures is likely to limit the growth of state-local aid. 49 / ACIR, op. cit., p. 8. 50/ Ibid., pp. 8, 25, 35. 5J7 Ibid ., p. 44 52/ Significant Features, 1978-1979, op. cit., p. 3. -24- The cresting of federal aid flows . The rate of increase in feder- al assistance to state and loral governments has begun to decline. If current trends continue, the real value of federal intergovernmental aids will actually diminish during the 1980s. 53/ If so, state govern- ments will come under increasing pressure to target diminished resources and address severe cases of community economic decline. Tax and expenditure limitations . A 1979 Rand Corporation study reports that 23 states enacted statutes or constitutional amendments limiting state or local taxes or spending during the 1970s . 54/ Limi- tations on local revenue raising powers, like those imposed under Cali- fornia's Proposition 13, are likely to place additional stress on state fiscal systems, should the state attempt to compensate for shortfalls in local revenues. The assumption of more general local assistance functions, of course, diminishes state capacities to provide special- ized economic development aid. Similarly, limitations on state taxing or spending powers, which have been adopted by a number of states, directly constrains state abilities to remedy economic decline pro- blems. C. Political Constraints The popular pressure which produced the taxing and expenditure limitations discussed above could also limit state enthusiasm for the provision of extensive local development aid. According to Rand, "sketchy evidence suggests that a newly frugal electorate .. .has voted in more tightfisted of f icials . "55/ Similarly, a 1976 ACIR study found a substantial diminution in voter approval of proposed state and local bond issues during 1975. Subsequent impressionistic evidence also suggests that "infrastructure improvements are beginning to get a nega- tive response from local electorates . "56/ The possibility that a shift in voter attitudes could undermine the creation and execution of state development strategies is very real. The National Academy of Public Administration reports that the political demands of urban constituencies were decisive in gubernator- ial decisions to formulate strategies in a number of states, includ- ing California, New Jersey and Michigan. 57/ A significant diminution in popular support for state development initiatives, then, could trigger a substantial state withdrawal from this policy area. 53/ Ibid . , p. 1. 54 / Anthony H. Pascal, et . al., Fiscal Containment of Local and State Government (Santa Monica: Rand Corporation, 1979) , p. 23. 55_/ Ibid ., p. 24. 56 / ACIR findings cited in ibid . , p. 26; subsequent evidence noted in ibid . , loc . cit . 57 / National Academy of Public Administration, The States and Urban Strategies: A Comparative Analysis (Washington: National Academy of Public Administration, working draft, forthcoming), pp. 16-18. -25- To date, it is unclear whether electoral opinions have shifted suffi- ciently to cause such a retreat. Other evidence suggests the possibility that state advances on the local development front could be impeded or negated by election year changes. According to ACIR, defeats of incumbent administrations in a number of states has "delayed the consideration and implementation of procedural and program reforms proposed by the executive branch."58/ Peirce, Hagstrom and Steinbach, discussing Massachusetts' 1977-78 development policy, concur: A danger in ambitious programs such as the Massachusetts urban strategy is that the program may be discontinued or momentum lost with the accession of a new state administration. Thus, the future of the Massachusetts initiative was uncertain as former Governor Dukakis left office in early 1979, although a number of administrative and legislative changes were likely to remain. 59/ Lastly, there is one often overlooked but significant constraint on the state role. As one Federal economic development official has noted, a real constraint on state intervention in local economies, and the reason many states focus on rural and suburban development is because large cities like it that way! 60/ PTI ' s survey bears this out. Many large cities prefer to deal directly with the Federal Government. They have worked hard to establish successful working relationships with the Federal Government and while their relationships may not be perfect — they may prefer to leave well enough alone. 58/ ACIR, op. cit ., p. 8. 59 / Peirce, op_. cit . , p. 33 60 / Conversation with Pamela H. Wev, Program Development Division. EDA. -26- III. ISSUES ANALYSIS Chapter III explores the ma}or policy issues which surround the topic of state intervention in local economies. These include the implications for large cities of "targeted" development strategies as opposed to "balance growth" approaches; the appropriate role for states to adopt vis-a-vis the private sector; and the costs and benefits to urban jurisdictions of state intervention in local economies. The chapter concludes with a discussion of the role that urban governments might play in the creation and oversight of state-local development policies. Targeting Versus Balanced Growth An important issue surrounding the emerging state role in economic development is the extent to which state governments should "target" assistance to distressed urban and rural communities. The term "tar- geting" refers to the method employed by states and other jurisdictions to allocate scarce resources among competing communities. The target- ing of aid monies means that funds will be concentrated on a relatively limited number of jurisdictions selected on the basis of need, while other communities receive minimal or no assistance. Local need crite- ria are defined by the sponsoring jurisdiction, and can vary consider- ably from state to state. The practice is predicated on the belief that channeling assistance to local governments most in need represents the most efficient expenditure of state aid revenues. The alternative to targeting is to adopt a balanced growth strategy that distributes assistance monies to virtually every community in the state, with more limited reference to the concept of need. A. Does Targeting Favor Large Cities? Local government practitioners in large cities are naturally concerned as to whether their state should adopt a "targeted" or a "balanced growth" approach to the provision of economic development aid. As larger jurisdictions, particularly the older cities of the northeast and north central states, tend to suffer disproportionate levels of economic, fiscal and physical distress, big cities would presumably benefit from a strategy that targeted aid to distressed communities . This, however, is not necessarily the case. A state policy of targeting aid to distressed communities need not favor urban jurisdic- tions, particularly if the state is dominated by sagging small town or suburban economies, or by impoverished rural areas. Large cities will benefit only if the targeting strategy employed by the state is expli- citly and finely tuned to the needs of large, urban jurisdictions. As -27- we shall see, however, the concept of targeting can be molded to a variety of local concerns, and does not in and of itself speak to large city interests. B. Are the States Targeting Economic Development Aid? To date, state efforts to target fiscal assistance, development aid, and general expenditures have tended to be infrequent and limited in scope. Targeting tends to be most common in the highly urbanized states of the northeast and north central regions, where development funds are directed to declining, central city areas. Nationwide, however, the states have "rejected the concept of targeting for the concept of balanced growth," preferring to distribute aid monies broadly, rather than concentrating assistance on the neediest jurisdictions . W The theme of balanced growth is most frequently invoked throughout the southern and western portions of the country, although the develop- ment strategies of such urbanized states as Pennsylvania and Illinois have also embraced the balanced growth concept. Balanced growth strat- egies are marked by the attempt to develop a consensus between compet- . ing urban and rural interests. Consequently, local aid funds and private development incentives tend to be made available in every community in the state, rather than restricted to jurisdictions experi- encing substantial decline. In the southern and western regions, an emphasis on balanced growth is likely to lead to the implementation of state economic improvement programs which focus on the needs of small towns and rural areas. In more highly urbanized states, the adoption of a balanced growth theme tends to result in the enactment of aid efforts which accord equal importance to large city and rural problems. C. Why Do States Prefer Balanced Growth to Targeting? To an extent, state preferences for balanced growth strategies may stem from the extent and nature of distress experienced by their con- stituted jurisdictions. In a number of southern and western states, for example, the economic growth and decline problems faced by rural communities and small towns are more severe than those encountered by larger urban jurisdictions. Adherence to the balanced growth motif on the part of these states may well represent a rational attempt to reduce the comparative advantages enjoyed by larger cities. The states' limited interest in targeting development aids also appears to derive from the views of state officials as to the appropri- ate forms of state intervention in local economies. As the National Academy of Public Administration notes: 1/ ACIR, op. cit., p. 4. -28- There is another important policy (reason for the states' reluctance to target aid)... . It is a pervasive belief at the state level that strategies must address problems that are state- wide rather than concentrate solely on central city distress. This belief ...is grounded in substantive assumptions about the nature and causes of urban distress. These assumptions are that strengthening the economy of the state as a whole will benefit depressed areas, (and) that stopping rural decline through agricultural preservation and small town development will stem the influx of new problem residents to the cities ... .2V Finally, the states' reluctance to substitute targeting for more inclusive aid patterns is likely to be related to the difficulties associated with the execution of a targeting strategy. These include: • The expense and analytic problems incurred in develooing cri- teria for targeting local economic aid. Existing data are like- ly to be inadequate for this task. • The heightened risk and expense of undertaking multiple, indi- vidualized targeting projects at the local level. Generalized expenditure programs, administered uniformly throughout the state, are more likely to realize economies of scale. • The political unpalatability of targeting. Inclusive state aid programs are more likely to win broad legislative support. The political considerations which militate against the adoption of targeted development strategies are particularly significant. Recent case studies suggest that the enactment of development strate- gies is predicated in many states on the support of broad coalitions of interests, including urban advocates, agricultural groups, environmen- talists, and proponents of economic growth.^/ In order to maintain such coalitions, state development strategies must adopt inclusive dis- tributional patterns, and preserve a careful balance among competing urban, rural, environmental and development goals. Balanced growth strategies, which neither favor nor slight any particular interest group, are likely to generate the needed support; targeting strategies, which raise divisive resource allocation questions, are not. The popularity of balanced growth strategies relative to pro-urban targeting plans is also indicative of the lack of political leverage enjoyed by city governments in the state capitals. While the legisla- tive reapportionment decisions of the 1960s guaranteed that urban ju- risdictions would be accorded full representation in the state legisla- tures, subsequent population shifts reduced central city political strength. The growth of suburban areas has meant that most state 2/ NAPA, op. cit_. , p. 53. 3/ Ibid., p. 63. -29- legislatures are unlikely to be governed by unambiguously urban interests; rather, state policy is generally shaped by coalitions dominated by suburban interests. D . Should Large Cities Favor Heightened State Involvement in Urban Economic Development? These considerations raise serious questions as to whether large cities are best served by encouraging heightened state involvement in urban economic issues. Simply put, if the concept of targeting state aid to distressed cities is as unacceptable to state governments as the record shows, and if state legislatures are weighted in favor of coali- tions dominated by suburban legislators, is it wise for cities to support the expansion of opportunities for state involvement in local development? Current evidence indicates that state economic improvement activ- ities are unlikely to favor urban needs. Admittedly, the development strategies adopted by a handful of states in the northeast quadrant endorse the targeting of economic assistance to economically lagging jurisdictions, but these efforts are in the minority. Indeed, an adherence to targeting by state officials need not necessarily guaran- tee additional assistance to large cities. In the southern and western regions, for example, rural and small town economic needs are often more pressing than are those of urban centers. While the southern and western states have employed balanced growth approaches in the provi- sion of local economic assistance, their sudden endorsement of target- ing scenarios would be unlikely to result in substantial gains for larger cities. These considerations suggest that the representatives of large cities, indeed all local officials, would be well advised to examine the patterns governing the distribution of state-local aids, including revenue sharing and education finance monies, general expenditures, private sector financial assistance and local development grants. As noted above, state-local assistance monies are typically distributed inclusively, in part to avoid the political and technical difficulties associated with channeling aid funds on the basis of need. These distribution decisions, however, are rarely undertaken with specific reference to state and local economic development objectives. Explicit inclusion of economic goals in the distributional calculus could help to redistribute local assistance monies to aid the most pressing cases of urban and rural distress. It is important to remember, however, that the adoption of a state policy to target aid to distressed local jurisdictions is not necessar- ily an endorsement of special assistance for large cities. Such a pol- icy could just as easily imply a program of targeted aid to under- developed areas, potential growth centers, or distressed rural communi- ties, at the expense of large, comparatively advantaged, metropolises. -30- Toward An Urban Government Role in State Economic Development Policymaking As the foregoing material illustrates, state governments, despite certain constitutional, political and fiscal constraints, represent a potentially powerful force in the process of local economic change. Certainly, more forceful state intervention in the creation of local economic development policy will require a reassessment of state-local relationships, and generate both problems and opportunities for large urban governments. The following section explores some of the policy questions that are likely to face local governments as a result of the trend toward increased state involvement in local development issues. The section opens with a review of the probable costs and benefits to urban juris- dictions of heightened state involvement in community economies fol- lowed by a presentation of urban consortium survey data presenting city officials' views of appropriate state development roles. The nature of a constructive urban government role in the state economic policymaking process is then considered again with reference to the Consortium's poll findings. The section concludes with a discussion of several noteworthy approaches to stimulate state-local interchange on economic development issues. A. The Costs and Benefits of State Intervention in Local Economies Benefits. Heightened state interest in local development policy is likely to result in the creation of new state-local assistance programs, as well as in the modification of existing aid efforts. At minimum, such program development activities may be expected to gener- ate a short-term increase in state financial assistance for localities, as well as a more effective use of existing resources. Ideally, from the large city perspective, a sustained state commit- ment to local economic growth would be manifested in the formulation of a long-term development program, which provided both a new source of flexible funding for large cities and a framework for the systematic modification of state taxing, spending and regulatory policies. The benefits of a carefully designed strategy of this type would be likely to include: • Limitation of harmful interlocal competition for industry and employment . The state's ability to regulate local taxing powers could prevent interjurisdictional tax competition and duplica- tive municipal incentive programs designed to encourage within- state business migration. • Enhancement of positive self-help capabilities . State controls over the scope of local powers could be used to enhance munici- pal revenue raising and redevelopment capabilities, provided -31- that such powers were not employed to produce undesirable local competitive effects. • Heightened recognition of specialized regional and municipal development needs . State development policies are highly sensi- tive to differing regional development requirements, particu- larly in contrast to national development efforts. Some evi- dence also suggests that state-directed intergovernmental aid dollars are more accurately channeled to distressed municipali- ties than is direct federal assistance .4/ • Improvement of state tax and regulatory climates for economic growth . A sustained state economic growth strategy would pre- sumably reduce interstate disparities in corporate taxation, as well as enhance within-state opportunities for business expan- sion through the modification of regulatory controls. Costs . As suggested later in the text, state-local development programs are likely to be incremental in nature, rather than reflecting 'a coordinated approach to local economic growth. Thus, the benefits commonly associated with state intervention in local economic develop- ment could well be diluted. State development efforts could also result in a number of disadvantages for local governments, including: • Perpetuation of existing growth and decline patterns . If economic assistance were not channeled to distressed local jurisdictions, state upgrading efforts could perpetuate exist- ing growth patterns, exacerbating decline conditions in some areas; this could be particularly costly to large, urban communities. • Diminution of local autonomy . A heightened state role in local economic development could lead to a diminution in local autonomy in the planning and execution of economic development programs. • Increased local red tape . A stronger state-local development role could lead to an increase in state-imposed planning, data collection and reporting requirements related to community economic development needs. 9 Heightened friction among local government units . State entry into the economic development policy arena could engender political competition between local governments for finite quantities of state development grants and fiscal assistance. 4_/ See National Governors' Association, Bypassing the States: Wrong Turn for Urban Aid , Research Notes No. 4 (Washington: National Governors Association, 1979) . -32- B. K Central City Perspective on Heightened State Involvement in Urban Economic Development The supposition that heightened state intervention in urban eco- nomic development confers both costs and benefits on city governments is supported by recent survey data collected by Public Technology, Inc . s (PTI) for the Urban Consortium. PTI ' s poll of economic development practitioners in (twenty-five) Consortium jurisdictions suggests that urban officials have mixed feelings about the desirability of expanding the current level and nature of state involvement in urban economies. The majority of respondents (65 percent) favored heightened state involvement in urban economic development issues if state activities could be shaped by central city priorities. Generally, respondents in this group supported greater state involvement if local control over development activities could be maintained. The role envisaged for the state was a collaborative one in which city/state cooperation would enhance local abilities to execute development projects. Under this scenario, state enabling, financing and industrial recruitment powers would be used to further urban self-help capabilities. Respondents in this category, however, were apprehensive about the possibility that an expanded state urban economic development role could lead to the diminution of local autonomy in determining develop- ment policy. As an official from a large, southern jurisdiction re- marked, "I don't want our (local) economic development policy dictated to us from (the state capital)." Similarly, another city official noted that "many state capitals are located in rural areas and small towns... and that state bureaucrats are frequently individuals who grew up in small towns, live on farms outside the capital, and don't like any part of big city development." The officials suggested, further, that the "fundamental philosophical differences which exist between state bureaucrats and city officials could make a policy of forced state involvement in urban economic development a disaster." Urban officials in this group did not support an expansion of state-executed development proiects within their jurisdictions, feeling that city pro- gram development and delivery capabilities were more sophisticated than those of the state. In sum, these respondents were not willing to cede local control of development programs in exchange for greater amounts of state aid. The juxtaposition of the views of the remaining respondents fur- ther illustrates the costs and benefits which urban officials associate with the potential expansion of state economic development activities. About one-fourth of the respondents favored, without qualification, the expansion of state urban economic development activities, believing that heightened state awareness of city development needs would lead to the enactment of more comprehensive and urban-oriented state-local eco- nomic development programs. In support of their view, respondents in -33- this group pointed to the breadth of state powers to affect urban economies, as well as to the benefits that could flow from state-city financial assistance. In contrast, a few respondents (9 percent) opposed any expansion of state economic development activity. Urban officials expressing this sentiment feared that heightened state involvement in the development field would lead to the perpetuation and expansion of state programs oriented toward small towns, suburbs, and rural areas, thereby exacerbating central city decline. In sum, the survey data reflected a diversity of urban views as to the utility of enhanced state participation in the provision of economic development aid. While the majority of urban officials would view such a development favorably, this outlook is tempered by fears that heightened state intervention could threaten local abilities to design and execute economic development programs. Thus, support for direct state involvement in city economic development problems is eschewed, with the optimal state role regarded as f acilitative and indirect. In this context, state-local financing and enabling powers would be used to enhance urban self-help capabilities, with more active state economic development programs, such as industrial recruitment and facilities siting efforts, used to bolster locally designed and executed urban economic development programs. C. The N eed for Local Involvement in the Creation of State Economic Development Policies While central city officials differ in their views of the most appropriate state economic development role, there appears to be sub- stantial agreement that state action in the development sphere should be highly supportive of city upgrading efforts, facilitating the en- hancement of city development capabilities. In order to ensure the implementation of such positive state-local economic development poli- cies, urban government officials are urged to maximize their involve- ment in state program development and execution. To date, however, local interest in the construction and implementation of state develop- ment plans has been sporadic. As Frank Keefe, former chairman of the Massachusetts Development Cabinet, notes, . . .many city advocates view the relationship between states and the urban development process' as only passive and indirect or, worse, entirely irrelevant... When a crisis arises, most local officials turn to their congressional delegations or to federal officials before they call on their governor or a state agency. As a result, city officials often are more familiar with the streets of Washington, D. C. than they are with the streets of ■34- their own state capital. _5_/ Keefe's observation is supported by the PTI survey of economic development professionals. When asked about state-city relationships in the economic development field, several respondents volunteered that, over the years, their city had come to look upon the Federal Government as the primary source of development aid. By contrast, these officials viewed the state government as a relatively weak and untested alternative source of development assistance. PTI's poll also suggests that the lack of state and city govern- ment coordination on the economic development front may well be attrib- uted to the inadequacy of existing state-city information transfer networks on economic development issues. When asked to rate the qual- ity of information they received on state urban economic development efforts, most (65 percent) of the city development officials responded with a rating of fair, inadequate, or poor. Almost uniformly, respon- dents attributed the deficiency to the infrequency with which informa- tion on state-local development policies reaches urban officials. Similarly, while 35 percent of the sample rated the quality of in- formation they received on state development activities as good, a few of these officials qualified this response by stating that material arrived too sporadically, or was not pertinent to city development concerns. Indicative of the inadequacy of state-city information sharing is the extent to which survey respondents were unfamiliar with their states' Section 302 Planning Programs. Funded by the U.S. Economic Development Administration (EDA), the 302 planning program provides grant monies to states to promote the expansion of job producing, private-sector investments. EDA's planning assistance supports the systematic planning and analysis of state and local economies, and the formulation and implementation of development programs in 47 states, six urban counties, 45 cities and five metropolitan agencies (per FY78 data). EDA's 302(a) planning assistance program is intended "to improve the coordination between State policy development and the activities of substate districts . "6/ Remarkably, a majority of the respondents (61 percent), stated that their city or county had not been consulted in the formulation of their state's 302 plan. Similarly, 83% of the development officials polled were unfamiliar with the contents of the state plan, or asserted that the plan did not reflect their jurisdiction's needs or economic conditions. 70% of the respondents stated that their local unit did not make use of the economic data con- 5/ Frank T. Keefe, "States are Key Partners," in Negotiating the City's Future (Dayton, Ohio: Charles F. Kettering Foundation), 1979, p. 7. 6/ 1978 Annual Report , Economic Development Administration, U.S. De- partment of Commerice, p. 26. -35- tained in their state's 302 plan, while 22 percent were uncertain whe- ther the data were used by local officials. The seemingly sporadic transmission of information on state de- velopment policies to local officials may be attributed to the fact that many city officials receive the bulk of their information on state development policies and programs through highly informal processes. Most of the survey respondents (70 percent) stated that informal con- tacts with state executive branch and legislative staff represented their primary source of information on state economic development ini- tiatives. While this sort of ad hoc information gathering is no doubt highly effective in rapidly generating information on specialized development policy questions, it has apparently failed in many states to transmit to the city level a comprehensive view of state urban eco- nomic development initiatives. While 43 percent of the city officials responding to the survey attempt to supplement such information with secondary accounts from the mass media or from county and municipal league publications, more formal mechanisms appear necessary to ensure adequate state-city communication on economic development issues. It appears that the development of mechanisms to facilitate state- local communication on urban economic development issues could yield substantial dividends for urban jurisdictions. Recent research indi- cates that most state-local economic efforts are still in the formative stages. The experimental nature of many such development activities is suggestive of a malleable policy environment, in which continued urban involvement could exert a significant influence. There are three ways in which local urban representation during the periods of policy design and execution could affect state economic assistance efforts. First, the maintenance of an urban presence during the policy development process is likely to provide tangible constitu- ency pressures for the promulgation and continuation of state programs which address urban decline issues. Second, local input will help to assure that state development strategies and programs remain responsive to local economic needs. Third, local involvement in the policy devel- opment process could help to bring the shortcomings of current state economic development strategies to the attention of state officials. Establishment of a systematic feedback process from the local to the state level would appear to be particularly important in light of the fragmentary nature and perverse distributional consequences of some state economic development programs. In sum, a constructive local urban role in the state economic development policymaking process should be both on-going and deliberative, ranging from local assistance in the formulation of state goals and policies, to local oversight of the implementation of state-local economic aid programs. The creation and maintenance of cooperative ventures of this sort, however, is likely to require the -36- establishment of new forums and planning procedures to promote state- local interchange on local development issues. Several innovative approaches to this problem are described in the following section. D. Ne w Approaches To Promote State-Local Interchange in Economic Policy Development "Rottoms-Up" Planning . Although most state development strategy processes have been designed to incorporate some element of local participation in program planning, the local role is often limited and advisory. 7/ In such cases, state judgements and desires are likely to dominate the development program, at the expense of local goals and priorities. A number of states, including Massachusetts, Oregon and North Carolina, however, have developed "bottoms-up" planning proce- dures to maximize local involvement in the creation of statewide de- velopment strategies. "Bottoms-up" planning differs from traditional state planning procedures in that development strategy construction is carried out as a joint state-local responsibility. In Oregon and Massachusetts, for example, state development strategies were based on locally-constructed plans. The role of the state was to reconcile conflicting local and regional obiectives; the final strategy documents were reflective of local priorities. North Carolina's Balanced Growth Policy was developed through a similar process. State strategy goals were distilled from the issues raised in 100 public conferences held at the county level during 1977.8/ Local Implementation Roles in State Development Policy . If local officials are to play a sustained role in state economic policy de- velopment, the assurance of on-going local participation in strategy implementation would appear desirable. North Carolina and Oregon are two states which have provided for systematic local involvement in the strategy execution process. Pursuant to its Balanced Growth Policy Act, North Carolina created two bodies to review state development procedures, the Local Government Advocacy Council, and the Office of Local Government Advocacy. The Council is comprised of local officials, while the Advocacy Office is staffed by former local officeholders. Both bodies were created to advise the Governor and cabinet officials on the development and imple- mentation of programs affecting local jurisdictions. Present plans call for substantial Office and Council involvement in establishing criteria for the selection of growth center communities under North Carolina's Balanced Growth Policy. 9/ ]_/ Keefe, op. cit . , p. 25. 8/ Ibid . , pp. 26-27 9/ Ibid., p. 26. ■37- By contrast, Oregon's urban strategy, which is embodied in 20 state-wide planning goals, is dependent on local execution. Where North Carolina has built a strong local oversight role into the con- struction of state development efforts, the Oregon growth management plan requires local units to develop and implement comprehensive plans which fulfill strategy objectives . 10/ Both the North Carolina and Oregon efforts, however, assure continued local involvement in state-local development activities. The Negotiated Investment Strategies Experiment . A new policy process to enhance intergovernmental cooperation is the Negotiated Investment Strategies (NIS) effort, now underway in three midwestern cities: St. Paul, Minnesota; Gary, Indiana; and Columbus, Ohio. Under the pilot process, which was introduced under the auspices of the Federal Regional Council, local urban policy strategies are designed through negotiations among local, state and Federal officials. The NIS experiment provides a forum in which representatives from the three levels of government determine common urban development priorities and resolve intergovernmental differences on policy objectives. Ultimate- ly, the negotiations are expected to produce explicit state and Federal regulatory, fiscal and expenditure support for local development goals. The participation of Minnesota, Ohio and Indiana officials in the NIS process is intended to enhance those states' appreciation of the pro- blem facing their major cities, as well as produce substantive policy changes in state-local urban assistance efforts. 11/ In short, the growing involvement in local economic issues demands that state governments and local jurisdictions forge strong, continuing and cooperative relationships in the formulation and execution poli- cies. The procedural reforms discussed above represent promising inno- vations to this end. 107 Ibid . , p. 27. 11 / See Negotiating the City's Future , op . cit . , for a detailed explan- ation of the NIS process. -38- IV. CURRENT APPROACHES This chapter presents an overview of current state-local develop- ment activities, touching on common achievements and shortcomings, as well as on regional distinctions among state approaches to local growth and decline issues. The appraisal of the states 1 recent record on com- munity economic aid is followed by a more detailed presentation of a number of promising state initiatives to spur local development. State-of-the-Art : Recent State Economic Development Efforts Analyses of recent state-local economic development efforts indicate that the past three years have been characterized by an expanding state interest in ameliorating local decline problems, both in central cities and rural areas. By all accounts, state economic development assistance aids tend to be narrow in scope. The states rely heavily on incremental invest- ment strategies that draw on loans, grants and tax incentives to pri- vate industry as the primary means of stimulating economic growth. Many strategies appear cost-ineffective; often, state development offices spend disproportionate shares of their limited resources on retaining or attracting a single industry or large corporation. In many states, these efforts go hand-in-hand with aggressive marketing campaigns designed to promote the comparative advantages of the state as a site for economic development. Recent evidence suggests, moreover, that while state development initiatives have begun to address urban concerns, such policies and programs continue to favor suburbs, small towns and rural areas. As noted in chapter I, 83 percent of the economic development officials who participated in PTI ' s survey felt that the development activities undertaken by their state were oriented toward the needs of jurisdic- tions outside the central city. This perception is consistent with evidence cited in chapter III suggesting that state governments have adopted balanced growth approaches to the provisions of development aid, requiring assistance monies to be distributed broadly, rather than targeted to economically lagging jurisdictions. Despite these common attributes, there is considerable regional variation among state approaches to the provision of local economic assistance. The most prominent regional distinctions occur along the following lines: -39- The Northeast and North Central States . The northeast and north central states emphasize economic development programs assisting declining central cities, including state grants and loans for the improvement of industrial facilities, and tax incentives to encourage business expansion. These states are the most likely to target econom- ic development efforts to distressed communities. By contrast, fiscal reforms to relieve the financial burdens of needy jurisdictions and efforts to improve local revenue-raising capabilities are least likely to be found within the northeast quadrant. 1/ The Southeast and South Central States . The southeast and south central states have focused economic development activities on small towns and rural communities, where problems of underdevelopment and decline are most severe. States within this region are particularly likely to offer industrial siting, customized job training, and tax incentive programs to encourage business development. Local economic aids tend to be available statewide throughout the region, although development plans in some southern states endorse the provision of preferential assistance to small and medium-sized growth centers. 2/ The Western, Mountain, and Northern Plains States . States within this region are characterized by rapid private sector growth, centering about the development of natural resources. "Generally, state offi- cials (of the western, mountain and plains regions) .. .are pleased by the revenue and employment growth engendered by economic expansion, but are wary of the environmental despoliation and population pressures that can accompany industrialization. "3/ Accordingly, these states favor the regulation of industrial growth, and attempt to balance development goals against environmental preservation objectives. Local economic assistance programs often center on the needs of small commu- nities unequipped to manage rapid industrialization, while other efforts are designed to alleviate rural decline in underdeveloped areas .4_/ The new crop of state economic assistance efforts indicates a growing willingness on the part of state governments to take remedial action on local economic growth matters. Still, the activities which have been undertaken to date fall short of the comprehensive fiscal, regulatory and expenditure reforms which the states might employ to alleviate urban distress. Present aid activities are largely restrict- ed to incremental program changes centering around infrastructure im- provements and private sector financial incentives, some of which do relatively little to stimulate lagging economies, and may actually 1/ ACIR, op. cTt . , p. 4; see also ACIR/NAPA, op. cit . , p. ii . 2/ Ibid .,^". 5; see also ACIR/NAPA, loc . cit . 3/ Ibid . , loc . cit . 4/ Ibid. , pp. 5-6. -40- exacerbate urban economic decline. Fiscal and regulatory reforms to aid distressed local economies have been less prevalent, and are rarely initiated in conjunction with more direct economic development efforts. Similarly, most state governments have yet to develop procedures to reform state expenditure patterns to encourage urban economic develop- ment activity. » PTI's survey data support the inference that many recent state development initiatives are incremental in nature, centering around the provision of new infrastructure. Survey respondents cited 35 examples of joint state-central city development projects, of which two-thirds were physical upgrading efforts involving the preparation and develop- ment of commercial sites. Roughly half the respondents felt that pro- ject impacts on central city development had been positive or very positive, while all but one of the remaining respondents felt that program effects had been minimal to date. A little less than one- fourth of the survey respondents were unaware of cooperative state- city development ventures. Although far from comprehensive in nature, the new state interest in urban economic growth and decline problems appears promising, parti- cularly when viewed in the context of the states' past inattention to local development issues. It will be incumbent upon city officials, however, to influence emerging state economic assistance policies to ensure protection of the interests of large, urban jurisdictions. The next section provides an overview of some of the more promis- ing actions states have taken to address local development problems, with particular reference to those innovations which could prove most beneficial for big cities. Promising State-Local Economic Development Activities A. Comprehensive Development Strategies To date, relatively few states have designed comprehensive devel- opment strategies. Among the earliest and most widely publicized strategies were those of Massachusetts, Michigan and California: • The 1977 Massachusetts Growth Policy Report advocated the use of state siting, permitting and expenditure powers to contain metropolitan sprawl and revitalize urban areas. The state has begun to implement several strategy goals by revising regula- tions to target the placement of state offices and facilities in urban centers, and by granting priority treatment to the completion of city sewer, school and transit construction pro- jects. Strategy implementation has slowed somewhat in the wake of a change in gubernatorial leadership. 5/ 5/ Ibid., p. 23. -41- • Michigan's January 1978 urban policy strategy focused on the economic and community development needs of its larger cities. The strategy called for the enactment of tax incentives to promote job creation and commercial rehabilitation, as well as for direct state funding for neighborhood preservation and job training activities. Michigan has enacted a number of measures to implement strategy goals, including the creation of a job development authority and the initiation of a home and neighborhood improvement program. 6/ • California's urban strategy, released during February 1978, emphasized new urban spending measures, most notably a $3 million housing program, and called for the establishment of local planning requirements to reduce metropolitan sprawl and upgrade city centers. While attempts have been made to imple- ment strategy recommendations, the fiscal pressures generated by Proposition 13 have led to the abandonment of many proposed urban spending measures, including the $3 million housing in- itiative.^/ The experiences of Massachusetts, Michigan and California suggest that comprehensive development strategies are likely to be implemented incrementally, with enactment of proposed reforms often delayed or aborted by political or financial pressures. Still, state interest in the construction of comprehensive development strategies appears to be growing. According to a 12-state review conducted by the National Academy of Public Administration (NAPA), a number of other states have made considerable advances in developing mechanisms to address local economic decline in a comprehensive manner: • Oregon has established 19 statewide planning goals to regulate the nature and location of local development. Economic growth is to be encouraged in areas considered deficient through the use of such tools as tax incentives, land use controls, pre- ferential assessments and capital improvement plans. The plan- ning goals have the force of law: local and individual com- pliance with the goals may be enforced through the courts. 8/ • North Carolina has designed a Balanced Growth Policy which advocates the designation of country growth centers as economic development nodes. Growth nodes are to be selected in order to equalize levels of economic activity and public service availa- bility throughout the state, and appear likely to be located in less-developed rural areas. 9/ 6/ Ibid ., p. 24. 7/ Ibid . , p. 13. 8/ NAPA, op . cit . , p . 9 . 9/ Ibid., pp. 17, 35-55. -42- • Connecticut's Conservation and Development Plan established annual reviews of the budget and capital planning proposals of all state agencies, to ensure compliance with state urban de- velopment priorities. The plan also contemplates the develop- ment of need criteria to ensure the distribution of future state-local aid increases to distressed local governments . 10/ The NAPA review also provides useful insights as to the prerequi- sites to and possible directions for successful state economic develop- ment policies of the future. Among the most significant findings: • States are becoming more sophisticated in formulating economic development plans, developing strategies that will produce acceptable tradeoffs among competing economic, environmental and distributional goals. 11/ • States would be well advised to upgrade their organizational capabilities to effectively design and execute economic im- provement strategies. In the states studied by NAPA, "there has been an emergence and strengthening of a central policy/ planning staff under the governor, which has taken the lead in developing and coordinating the strategy ... Strategy effective- ness .. .appears to be correlated with this designation of a lead agency that has a close relationship to the governor, and a central policy and coordinating role. "12/ • States are starting to provide for a degree of local partici- pation in the strategy development process. In some states, including Massachusetts and Oregon, locally designed develop- ment plans provided the basis for the final state strategy. In other states, including California, Connecticut and Florida, the local role was primarily "reactive and advisory," with strategy proposals developed initially by the state, and revised on the basis of local comment . 13/ The NAPA findings suggest that economic development considerations could shape the creation of broader state urban strategies which encompass housing, land use, human service delivery and fiscal reform policies. While the desire and ability of individual states to design and implement such strategies is by no means assured, current trends suggest that successful state economic development strategies are those that are planned and implemented under the direction of a single lead agency, with provisions made for meaningful local participation in the strategy design process. It should be noted, however, that comprehen- sive development strategies need not necessarily reflect urban priori- ties. The strategies developed by southern and western states, for 10/ Ibid ., pp. 42-53. J!/ Ibid ., pp. 42-43. 11/ Ibid ., pp. 34-35. 13/ Ibid ., pp. 26-29. -43- example, are likely to concentrate on rural and small town needs. More highly urbanized states, however, tend to focus on the needs of declin- ing city jurisdictions. B. Infrastructure Development Infrastructure development is an important economic development tool. To date, state governments have undertaken a variety of activi- ties to rebuild industrial and commercial infrastructures in declining urban and rural areas. Of course, capital improvements alone cannot attract business to an area lacking the appropriate market and labor force, as a number of empty industrial parks built in Appalachia will attest. Nevertheless, 28 states offer site development assistance through a variety of vehicles, including grants (9 states), technical assistance (8 states), loans (7 states) and loan guarantees (4 states). In 15 states, site development activities are targeted to underde- veloped communities . 14/ Some of the more innovative programs that states have undertaken to upgrade metropolitan infrastructures are dis- cussed below. Targeted Site Improvements . A particularly ambitious infrastruc- ture development effort was launched jointly by New York and New Jersey during late 1978. Under a 10-year, $1 billion program, the Port Author ity of New York and New Jersey will develop central city industrial sites in northern New Jersey and in New York City. Ultimately, the bi-state effort is expected to create 30,000 jobs. The Port Authority project also represents an example of public/private cooperation for urban development; the leveraging of private funds is crucial to pro- gram success. Of the $1 billion in industrial investment expected to be generated by the effort, $600 million is expected to derive from the private firms which will occupy the completed sites . 15/ Land Banking. Land banking programs employ public funds to ac- quire, assemble and recycle sites for industrial use. As CUED notes, systematic land banking efforts can be especially important to the eco- nomic growth of "older communities, particularly those with little un- developed land available and without annexation powers ."16/ States can promote urban land banking by enacting legislation to permit the muni- cipal establishment of land banks, and by underwriting local land bank- ing activities. The state of Pennsylvania, for example, has appro- priated funds for the land banking effort conducted by the Philadelphia Industrial Development Corporation. 17/ 14/ ACIR/NAPA, op. cit ., pp. 17-18. 15 / ACIR, "How Are The States Helping Distressed Communities?," Infor- mation Bulletin , January 1979, p. 9. (Hereinafter cited as Infor- mation Bulletin . ) 16 / CUED, op. cit . p . 5 . 17/ Ibid., pp. 6-7. -44- States also can establish state-operated land banking efforts. During 1975, Massachusetts created a $49 million land bank to regulate the sale of surplus state properties resulting from the closing of five military facilities. While the land bank operates independent of local constraints, its enabling statute requires the deferral and review of land sales affecting the development plans of adjacent communities. Parcels sold by the bank have generally been used for industrial and commercial development . 18/ Speculative Building Programs . Speculative building programs stimulate economic development activities by constructing industrial and commercial properties to attract expanding or relocating businesses. As such, speculative building efforts are regarded as marketing tools. 19/ CUED reports that local governments have used speculative building projects to enhance the diversity of local economies, by attracting a number of smaller firms to the sponsoring jurisdiction. The technique may prove particularly attractive to communities dependent on a limited number of large employers . 20/ States can completely or partially underwrite speculative building projects, or can finance ancillary improvements for the project site. State efforts also can be employed to market the completed site to appropriate firms. At present, Wisconsin operates a small program to develop speculative buildings; the effort is targeted to the northern portion of the state. Under the program, the Wisconsin Department of Business Development provides 80 percent loans for local speculative building projects, helping the community to locate a tenant when the structure has been completed .21/ C. Industrial and Commercial Facilities Development Nationwide, 32 states have instituted programs providing financial assistance for facilities development to industrial and commercial enterprises. 22/ State financial assistance of this sort can promote the expansion of industries already located within a state, although the practice has relatively limited impact on interstate industrial migration. Facilities development aid can be particularly useful to distressed communities if assistance monies are directed to areas requiring an economic stimulus. Eleven states have attempted to promote the creation of targeted industrial facilities development efforts, of which the following programs are representative: 18/ Ibid. , PP< , 7-8, 19/ Ibid., P- 1. 20/ Ibid. , P. 2. 21/ Ibid., P. 3. 22/ AC I R/ NAPA. , op. cit . , p. 18 -45- • The Illinois Industrial Development Authority, created by the legislature in 1961, makes development loans to firms relocating to, or expanding within, areas experiencing high levels of unemployment . 23/ • Tennessee offers loan guarantees on industrial machinery and equipment for firms located in underdeveloped communities, generally small towns and rural areas. 24/ • Texas and Pennsylvania provide industrial facilities loans to local development agencies active in distressed communities. The Pennsylvania program is targeted to high unemployment areas, while the Texas effort is directed to rural areas experiencing population stagnation or out -migration. 25/ D . Small Business Assistance According to recent research, particularly the work of David Birch, small firms play a major role in job creation. Over the period 1969-1976, for example, firms with 20 or fewer employees were responsible for 51.8 percent of net new job growth. The role of small firms was particularly pronounced in those regions experiencing net employment decline, the northeast and north central sectors. 26/ The encouragement of growth among small businesses, then, would appear a particularly promising way in which states might stimulate urban economic development. Admittedly, states face a number of difficulties in attempting to assist small businesses. The high failure rate of small businesses makes such efforts risky and expensive,, Small businesses are scattered statewide, raising administrative costs associated with specialized assistance. Similarly, small businesses often require sophisticated technical assistance which requires expertise and financing beyond the capabilities of many state economic development staffs .27/ Accordingly, relatively few states have mounted small business aid programs directed to communities experiencing economic decline, although 30 states have enacted programs of specialized small business assistance. Loans, loan guarantees, technical assistance and procurement set-asides are the most common vehicles used by state governments to aid small businesses .28/ 23/ ~Ibid . , loc . cit. 24/ Ibid ., p. 19. 25 / Ibid . , loc . cit . 26/ For a good summary of Birch's work, see Daniels and Kieschnick, op , cit . pp. 11-21. 27 / Peirce, op. cit . , p. 37. 28/ ACIR/NAPA, op. cit., p. 21. -46- Connecticut, Maryland , and Illinois have developed small business assistance programs geared to urban needs. Illinois, like 14 other states, offers procurement set-asides for small businesses. Unlike most such state efforts, however, Illinois' program is targeted to firms located in iurisdictions with high unemployment .29/ Under a new Urban Jobs Development Program, Connecticut has iden- tified IS distressed municipalities for preferential economic aid. Un^er the initiative, small businesses are eligible for working capital loans of up to 50 percent of their reauirements ; and an 80 percent abatement of local property taxes on land, buildings and eauioment or 25 percent reduction in the corporate business tax for ten years on income generated by new investment . 30/ A third state innovation in small business development is repre- sented by Maryland's Small Business Development Financing Authority. Established during 1978, the authority provides working capital loans and loan guarantees for small and minority businesses which have been awarded government contracts. State funds will also be available to guarantee 10 percent of equity investments used to finance working capital needs. According to Maryland officials, the program will encourage small firms to bid on government contracts, providing economic dividends to Maryland's urban iurisdictions . 31 / The program is expected to stimulate growth in the Baltimore area. E. Assistance for Community-Bas ed Organizations State assistance for local non-profit development corporations can encourage the creation of community-owned and -operated enterprises in depressed urban neighborhoods. ^uch undertakings create new iobs and investment opportunities in central city areas, providing a focus for revitalization activities. Minnesota and Massachusetts have initiated particularly innovative efforts to assist community-based organiza- tions. The Minnesota Community Development Corporation (MCDC) was estab- lished in 1976 as a pilot venture serving three communities. Now an on-going effort operating in 17 communities, the authority provides planning and venture capital grants to non-profit community development corporations (CDCs). To be eligible for state aid, CDCs are restricted to serving areas in which at least 10 percent of the population have incomes below the federal poverty level. 32/ 29/ Ibid. , loc. cit. 30/ State of Connecticut, Report of the Urban Action Task Force (Hartford: State of Connecticut, December 1978), Chapter III, p. I. 31 / CURD, ojp. cit . , p. 20. 32/ Information Bulletin, op. cit., p. 10. -47- MCDC planning assistance may be used for the development of GDC organizations, the training of CDC staff, the preparation of neighbor- hood economic development plans, and the creation of specific upgrading proposals. Venture capital grants, which have been used by CDCs to establish and invest in small enterprises, may be used for the creation, expansion or purchase of business ventures, and for infrastructure development. MCDC grant applications are evaluated on the basis of the project's ability to create employment opportunities, generate a posi- tive, short-term impact in the assisted community, and maximize pro- fits. 33/ The Massachusetts Community Development Finance Corporation (CDFC), which became operational during 1978, purchases stock in non-profit local development corporations (LDCs) for the purpose of providing equity capital for community economic development projects. The CDFC was capitalized with an initial $10 million in state bond revenues, which are in turn to be used by LDCs to acquire or invest in community-based enterprises expected to generate employment growth. 34/ 1978 also saw the enactment of legislation establishing the Massachusetts Community Economic Development Assistance Corporation (CEDAC) . CEDAC is intended to serve as a technical assistance adjunct to the CDFC; the agency will provide local development organizations with advice on financial planning, market research, management tech- niques, grant development and legal affairs. CEDAC, which will ini- tially be financed with federal funds, is expected to help local com- munity groups develop and package economic improvement projects. 35/ F. Assistance To Enhance Local Development Capabilities As noted previously, state governments can affect local economic growth through their ability to structure local development and revenue- raising powers. State technical assistance to local governments can also enhance community self-help capabilities. Among the states which have taken recent action on this front are Louisiana and Michigan. During 1978, Lousiana enacted the Cooperative Economic Development Law, which enables local governments to create nonprofit development corporations for economic revitalization purposes. Under the statute, 33/ Unpublished materials provided by the Minnesota Community Develop- ment Finance Corporation. 34/ Unpublished material supplied by the Center for Community Economic Development, Cambridge, Mass.; see also Information Bulletin , op . cit . p. 10. 35/ Housing and Development Reporter , August 21, 1978, p, 339. See also "State Strategies to Support Community Economic Development," Ways and M eans, November-December 1979 (Washington: Conference on Alternative State and Local Policies), p. 5. -48- local corporations are empowered to conduct comprehensive planning activities, designate local redevelopment districts, and implement economic development programs. The corporations enjoy extensive de- velopment powers, "including the ability to acquire and dispose of property, the ability to issue tax-exempt revenue bonds, and the abil- ity to apply for and receive grants and loans. 36/ The Michigan Economic Development Incentive Concept (MEDIC) program was created in 1977 to encourage economic development and job creation activities in counties or major cities where unemployment is above the statewide average. Under the MEDIC enabling statute, county governments and major cities are empowered to create local "umbrella" development organizations, which act as lead agencies in the design and execution of local economic improvement efforts. By the end of 1978, umbrella authorities had been created in 11 counties and in the city of Detroit. 37/ Under the MEDIC effort, all umbrella organizations become eligible for three years of state financial, technical and management assis- tance. State-local support activities, which are conducted by Michigan's Office of Economic Expansion, also include advice on program coordination and grant management activities. Umbrella development units are expected to work closely with the local private sector and with officials of member communities in developing, funding and implementing economic improvement programs. During the three-year term of MEDIC support, 50 percent of program costs must come from local public/private sources. 38/ G. Job Training A potentially significant avenue for state intervention in local economies lies in the area of job creation. Customized job training programs, which link state employment policy to industrial recruitment efforts, represent a particularly promising method for rapid job crea- tion. Under such programs, state governments prepare labor pools to meet the specialized needs of growing or in-coming industries, thereby offering an inducement for firms to expand or relocate within the state. The programs are also highly effective in generating employment growth, in that they virtually guarantee trainee placement upon program completion. 39/ By mid-1979, 23 states had mounted customized job training pro- grams. The programs are employed most frequently in the southeast and 36/ ACIR, op. cit., p. 22. 37 / Unpublished material provided by the Michigan Office of Economic Expansion, 1978. See also Information Bulletin , p. 10. 38/ Ibid . 39/ ACIR/NAPA, op. cit., p. 22 -49- plains region, and are characterized by an emphasis on the "needs of individual employers, rather than on the requirements of communities experiencing unusual levels of underemployment or unemployment ."40/ Alabama, South Carolina and Georgia offer successful customized job efforts: • Alabama's Industrial Development Training Program was estab- lished in 1971. By late 1978, the program had trained 33,000 persons for placement in incoming industries. The use of mobile training facilities has accorded the state considerable flexibility in implementing training efforts. 41/ • South Carolina's customized jobs program is notable for the state's commitment to underwrite all training expenditures for eligible firms. Businesses availing themselves of state train- ing services are committed to relocating to or expanding within the state. 42/ • The Georgia Quick Start Program provides training specialists to design, develop and coordinate training programs at no cost to the firms served. The state also recruits and screens potential trainees, locates appropriate training sites, and provides training equipment from the state's $25 million equipment pool. 43/ The effectiveness of the Georgia, Alabama and South Carolina job training programs derives in part from the limited requirements imposed on participating firms. Eligible businesses are required only to expand employment opportunities within the state. Such efforts, how- ever, may well subsidize training activities which otherwise would have been financed privately and, in any case, do not necessarily direct state resources to high unemployment areas. Modification of customized job training programs, however, could address these difficulties, and render the programs suitable for employment creation in distressed urban and rural communities. Train- ing activities could be directed to jurisdictions experiencing high levels of unemployment, and linked to targeted site and facilities development efforts. To make the programs particularly relevant to central city areas, customized job training programs might be directed to small firms, community-owned enterprises, or other local businesses 40/ Ibid . , loc . cit . 41 / ACIR, op. cit ., p. 11. 42 / CUED, op. cit ., p. 12. 43/ CUED, op. cit., p. 12. -50- which otherwise could not afford to undertake employment expansion. Identification of such firms, and the coordination of employment train- ing with site and facilities development activities would heighten the difficulty and expense of mounting a state customized training program. A comprehensive effort of this sort, however, could reap additional dividends for distressed, central city areas. H. Regulatory Reforms To Spur Local Economic Development Regulatory reforms to change the structure of certain industries or to reduce reporting requirements incumbent on private firms can stimulate urban economies. Two avenues of state regulatory reform, insurance industry regulation and efforts to reduce private sector paperwork requirements, are discussed below. Regulating the Insurance Industry . State actions to extend the availability of comprehensive insurance coverage to urban businesses can help to stabilize the metropolitan economic base. To date, 28 states offer FAIR Plan coverage to provide essential property insurance to areas perceived as high risk, while 21 states also offer both fire and crime coverage on a statewide basis. The development of studies challenging conventional risk classification procedures and the enact- ment of legislation prohibiting insurance redlining are additional ac- tions that states might take to assure adequate coverage for business- es located in central city neighborhoods. Recent state advances on this front include the following: • The Massachusetts Insurance Commission has commissioned studies that "constitute major contributions to the literature on equi- ty and accuracy of risk classification. "44/ • A recent Illinois statute requires insurance companies to pro- vide the state with geographic disclosure data on their sales, cancellation and renewal records. Such data can be used to investigate charges of insurance redlining .45/ • Michigan, Missouri and Illinois recently enacted legislation which "prohibits insurance refusal or cancellation because of geographic location, race, or prior refusal not related to claims history. "46/ Reduction of Regulatory Requirements . As noted previously, the reduction of regulatory encumbrances on the private sector has been suggested as a means to spur local economic growth. A number of states have taken action to reduce the bureaucratic red tape that can impede business expansion: 44 / Miller, op. cit ., p. IV-4. 45/ Ibid ., p. III-3. 46/ Ibid., p. IV-5. -51- • California, Oregon and Minnesota are among the states which have established "one-stop shops" for business permitting. Such authorities enable new firms to meet all pertinent licens- ing requirements through one agency .47/ • Indiana has instituted a forms management program to reduce state-imposed paperwork requirements on private enterprises. The state originally identified over 60,000 forms used in business regulation, and has since eliminated over half. In- diana is now redesigning the remaining forms to further reduce paperwork. 48/ • Tennessee's Department of Economic and Community Development has established a service bureau to assist firms in meeting state regulatory requirements. The program is intended to "discourage the out-of-state relocation of Tennessee firms . "49/ • The Florida Bureau of Trade Development acts as an advocate for business interests before the state legislature, frequently suggesting regulatory reforms that will reduce "bureaucratic roadblocks" to industrial and commercial expansion. 50/ I . Fiscal Reforms To Enhance Urban Economies While 29 states still distribute the bulk of their tax and revenue sharing monies according to formulas which perpetuate interlocal fiscal inequalities, many states are beginning to develop fiscal aid programs based on local distress. The following are among more innovative ef- forts: • New Jersey's Urban Aid Program channels surplus state monies to 31 needy urban communities "on the basis of a formula weighting population or population density, number of children receiving AFDC assistance local tax effort, local tax valuations, and number of public housing units." In 1978, $39 million was distributed under the program. 51/ • Wisconsin has reviewed the state's revenue sharing formula to return a portion of state monies to localities in inverse pro- portions to local taxing capacity. Funds so distributed will provide additional revenues to less affluent jurisdictions .52/ 47 / Peirce, op. cit ., p. 14. 48 / U.S. Small Business Administration, The States and Small Business: A Report on the First National Conference on State Small Business Programs (Washington: USGPO, 1979), p. 37. 49 / ACIR, op. c_it., p. 36. 50 / Peirce, loc . cit . 51 / ACIR, op_. cit ., p. 28. 52/ ACIR/NAPA, op. cit., p. 30. -52- ■>■ • During 1978, Connecticut revised its program of general state aid to municipalities, with assistance payments weighted to favor small towns with low per capita income, 53/ Admittedly, state-local development activities which effectively channel aid to distressed urban and rural jurisdictions are encountered relatively infrequently. Still, state governments have initiated a number of promising programs to spur local economic growth in the fields of site and facilities development, job creation, fiscal reform, regulatory improvements, and red tape reduction. Although it is prema- ture to judge unequivocally the merits and impacts of these actions, the programs described above are examples for possible refinement and replication. Particularly innovative state programs have also been de- veloped to assist small businesses and community-based organizations. Given the potential importance of small firms and community-owned and operated enterprises in revitalizing central city economies, these ef- forts are deserving of further scrutiny by the officials of large cities . Recent and On-Going Research on State-Local Development Activities A. Present Condition and Probable Direction of State Urban Policy Research Heightened national interest in state urban policy roles has pro- duced a growing body of literature on state-local economic development efforts. The bulk of this literature is descriptive in nature, and has not endorsed specific policy recommendations. Still, many of the studies have been conducted by state interest groups and, not surpris- ingly, have tended to speak positively of recent state innovations in the development field, stressing the potential benefits to be derived from heightened state attention to local economic problems. The publicity generated in academic and government circles by these studies is likely to change state, federal and local thinking about development goals and objectives. For large cities, the merit of state involvement is a subject that will no doubt stir intensive debate, At the state level, however, legislators and executive branch offi- cials may be expected to endorse increased state intervention in local economies, and embark upon a re-examination of existing development programs . From the federal perspective, heightened state involvement in economic development issues is likely to appear a welcome trend. The expansion of state development roles could provide relief from federal budgetary constraints deriving from inflationary pressures and serious public scrutiny of federal expenditures. These considerations could lead to the revision of federal development programs to provide for a broader state role. 53/ ACIR, op . cit ., p. 15. -53- If our appraisal of Federal, state and local concerns is accurate, we can expect the growing interest in state urban roles to create an immediate demand for further research — research that reflects more varied interests and needs than the studies that have been produced to date. The following section describes some of the more recent pieces of state urban policy research which local practitioners might find use- ful. A more complete listing of relevant publications is contained in chanter VI. B. Recent and Forthcoming Reports on State Urban Policy General Research . The Council of State Planning Agencies (CSPA) has begun to develop a nine-volume series providing in-depth treatment of a variety of state economic development issues, including develop- ment finance, }ob creation and capital budgeting. The first two vol- umes of the series, Vaughan's State Taxation and Economic Development: The Challenge of the 1980s , by Peirce, Hagstrom and Steinbach, were published during 1979. An earlier CSPA research proiect, the 16-volume State Planning Series (1977), provides useful information on a variety of policy development techniques that states might employ in designing strategies to strengthen local economies. A shorter, more general piece on current and potential state development roles is Hamilton and Rabinovitz's The Urban Policy Role of the States , comoleted for the Office of Urban Policy, U.S. Department of Housing and Urban Develop- ment (HUD) during the summer of 1979. The report is especially useful for the perspective it provides on the fiscal constraints affecting state development policies. Catalogue of State Actions . A 50-state study of state-local aid activities was published by the Advisory Commission on Intergovernmen- tal Relations during 1979. The report, State Community Assistance In- itiatives , provides state-by-state descriptions of innovations in the fields of economic and community development, housing policy, and fis- cal reform, as well as an analysis of the trends characterizing state- local development efforts. A follow-up effort completed by ACIR and the National Academy of Public Administration (NAPA), catalogues state actions in aid of distressed communities, and constrasts these activi- ties with more general aid programs. The report, The States and Dis - tressed Communities , was completed during Seotember 1979. Another useful catalogue of state-local aid efforts was published in 1978 by the Council of State Community Affairs Agencies (COSCAA). The report , States and Their Communities: A Partnership for Revitali- zation, provides descriptions of many of the urban and rural aid acti- vities that have been undertaken by state departments of community affairs. The catalogue also lists contact persons for each oroeram discussed. -54- State Roles in Local Government Financial Management (1979), au- thored by research staff of the Municipal Finance Officers Association (MFOA) , recounts and analyzes the local regulatory policies developed bv nine states in the areas of debt management, budgeting, auditing and financial reporting. The report was published bv HUD's Office of Poli- cy Research and Development. An extensive cataloguing of possible state roles in economic development is now being completed bv the National Council on Urban Economic Develonment (CUED). The report, which Drovides a thorough analysis of state efforts to stimulate private investments throueh financing, regulatory and state-local technical assistance activities, will be published during 1980. Case Studies . The Council of State Governments has begun to publish a series of information papers detailing the operation of innovative state urograms, including economic development efforts. Monographs already in Drint include analyses of the Connecticut Pro- duction Development Corporation and Wisconsin's statewide neighborhood revitalization effort. An appraisal of a number of recent state-local economic develonment programs is contained in ACIR's "How Are the States Helping Distressed Communities?," an information bulletin pub- lished in January 1979. A series of 16 information reports on recent state-local develop- ment activities is being prepared by a consortium of public interest groups including the National Governors' Association (NGA) , COSCAA, CUED and CSPA. Each report will focus on one innovative program, and provide an in-depth analysis of the merits, shortcomings and technology transfer implementations of that effort. The information reports are part of a larger consortium research effort on state-local urban policy endeavors; much of the consortium's research is scheduled for comple- tion in 1980. Also during 1980, NAPA will issue detailed case studies of the urban strategy development process in twelve states. The case study reports and an accompanying summarv volume will detail the political and organizational prerequisites to strategy design, as well as the substantive implications of recent state urban strategies. The degree and nature of local participation in state strategy development will be treated extensively under the NAPA effort. Model State Development Strategies. ACIR's State Community Assistance Initiatives summarizes ACIR model legislation on state-local development concerns. The individual pieces of legislation were first published in ACIR's ten-volume State Legislative Program (1975). At present, CSPA is preparing model state-local economic development strategies in the fields of investment nolicy, tax policy and regula- tory policv. The model strategies will be published during 1980. -55- V. RESEARCH NEEDS AND OPPORTUNITIES A number of research Driorities are identified below. In our opinion, these are the most fruitful avenues of inquiry on the state role in urban economic development. Assessing the Impacts of State-Local Development Efforts To date, a number of descriptive studies have chronicled recent state-local economic aid efforts. Data detailing the impacts of state development programs on local economies, however, are fragmentary at best. Data specific to large cities are virtually nonexistent. There- fore, the monitoring and analysis of innovative state programs in the areas of iob creation, infrastructure and facilities development, and assistance to small business and community-based organizations would have important implications for large urban iurisdict ions . These activities are necessary to determine the effects of state programs on local employment levels, wages, and rates of business formation. Impact studies of statewide development assistance efforts are also needed to determine the distributional patterns which govern state aid, as well as the effects of such patterns on urban, suburban and rural economies. Finally, state economic policy analysts should at- tempt to assess the effects of broad fiscal and regulatory changes on local economic growth. While it is difficult to isolate and Quantify the impacts of such reforms, comparative case studies and opinion-based research could be useful in clarifying the relationship of fiscal and regulatory changes to business expansion. Identifying Community Distress Basic research to identify and measure the components of local economic distress would assist state and local officials in channeling economic aid to particularly needy communities. While the Nathan-Adams and Congressional Budget Office hardship indexes provide approximate measures of urban distress, these indexes could be further refined to provide more adequate assessments of central citv economic need. Addi- tional research is needed to develop similar indexes for rural areas, small towns, and rapidly growing "boom town" communities, all of which face specialized development needs. The construction of state-by-state data bases on variables included in index formulas also represents a prerequisite to the development of state-local aid programs funded on the basis of need. Comparative Studies of Targeted and General Assistance Programs To date, most state-local development efforts are available state- wide. Many economic development analvsts, however, contend that tar- geted orograms will more effectively stimulate economic growth and lo- -56- cal economic development programs. Statewide improvement efforts are more effective in stimulating overall economic growth, and in aiding economically lagging communities. A related research question is whe- ther general assistance programs generate sufficient economic develop- ment activity to stimulate depressed local economies. Integration of State Manpower Aids and Infrastructure Development Efforts At present, state economic development efforts tend to emphasize site and facility improvements. While the states are demonstrating increasing interest in manpower development activities, relatively few attempts have been made to link state employment and training activi- ties to physical revitalization efforts. Analyses of innovative ap- proaches in this field would be useful in developing new techniques to integrate infrastructure upgrading activities with manpower programs. Federal Roles in State Development Policy To date, federal development programs have been directed primarily at local governments. Still, state governments are eligible for EDA funding under the Title I public works program, the Title IX adjustment assistance program, and a number of smaller planning and technical assistance grant efforts. The states also participate in federally- funded highway development, historic preservation, small business, community assistance and rural aid programs. There have been no sys- tematic studies of the impacts of such federal-state aid programs on state abilities to address local development issues. Further research is needed to determine the nature of federal program requirements governing the use of development aids provided the states, and whether such requirements influence state-local development activities. Ulti- mately, such research could lead to the creation of more effective federal-state development programs, as well as to the development of joint federal-state efforts to address local decline. Information Transfer Networks More effective information transfer networks are needed to provide state and local officials with material on innovative economic develop- ment programs underway in other jurisdictions. Networks are also need- ed to inform local officials of community aid activities being under- taken within their states. The establishment of such information transfer networks would promote a national interchange on common devel- opment problems and approaches, and could facilitate development of an interstate data bank on innovative economic development reforms. Improvement of existing state-local information transfer proce- dures appears particularly crucial. Recent research efforts indicate that while state governments have attempted to solicit local opinion in -57- the creation and execution of development strategies, city and county officials are often unaware of state reforms in the area of community economic policy. The improvement of information flows between the state and local levels would enhance local understanding of state development initiatives, and would allow for greater local involvement in the design and oversight of state economic improvement efforts. Documenting State and Local Processes Used to Carry Out State Economic Development Objectives The survey of local economic development practitioners contained in this report represents a first attempt to measure urban views on emerging state development roles. The results indicate that municipal and county officials can provide a valuable perspective on the risks and rewards of heightened state involvement in urban economic develop- ment . The survey also hints that some state and urban governments have overcome the political and structural obstacles which have historically prevented them from undertaking joint state/city development projects, obstacles which ultimately caused them to regard joint development as a development mode of last resort. Indeed, recent examples show some states and cites experimenting with, and perfecting ways to, work to- gether to accomplish broad economic development objectives. The survey results make clear, however, that more comprehensive and rigorous efforts are needed to: 1) obtain definitive information on local practitioners views on the effectiveness and potential of state economic development activities in urban areas, (particularly regarding 302 planning (programs), and 2) document the processes cities and states are using to accomplish and coordinate economic development objectives such as business retention, neighborhood commercial develop- ment, etc. Addressing these research needs, a collection of case studies detailing the methods, mechanisms and processes cities and states are using to carry out varied, urban economic development objectives , would be enormously useful to city, state and federal governments alike. -58- VI. INFORMATION RESOURCES John Shannon Carl Stenberg Advisory Commission on Intergovernmental Relations 1111 - 20th Street, N.W. Washington, D.C. 20575 202/653-5540 Joseph Marinich Executive Director Council of State Community Affairs Agencies Hall of the States 444 North Capitol Street Washington, D.C. 20001 202/624-5850 Dick Howard Director of Innovations Transfer Council of State Governments P.O. Box 11910, Iron Works Pike Lexington, Kentucky 40578 606/252-2291 Michael Barker Associate Director Council of State Planning Agencies Hall of the States 444 North Capitol Street Washington, D.C. 20001 202/624-5386 David Arnold National Governors' Association Hall of the States 444 North Capitol Street Washington, D.C. 20001 202/624-5350 Susan Hiegel Urban Affairs Director National Conference of State Legislatures Hall of the States 444 North Capitol Street Washington, D.C. 20001 202/624-5400 John Peterson Director Government Finance Research Center Municipal Finance Officers Association 1750 K Street, N.W. Washington, D.C. 20006 202/466-2014 Larry Malone Research Director National Council for Urban Economic Development Suite 1009 1730 K Street, N.W. Washington, D.C. 20006 202/223-4735 Charles Warren Florence Zeller National Academy of Public Administration 1225 Connecticut Avenue, N.W. Washington, D.C. 20036 202/828-6500 Carol Shapiro Public Technology, Inc. 1140 Connecticut Avenue, N.W. Washington, D.C. 20036 202/452-7749 -59- VII. SELECTED BIBLIOGRAPHY Advisory Commission on Intergovernmental Relations. "How Are the States Helping Distressed Communities?," Information Bulletin No. 1-79 . Washington: Advisory Commission on Intergovernmental Relations, January 1979. Advisory Commission on Intergovernmental Relations. Significant Features of Fiscal Federalism, 1978-79 Edition , Report No. M-115. Washington: USGPO, 1979. Advisory Commission on Intergovernmental Relations, and National Academy of Public Administration. The States and Distressed Communities: Indicators of Significant Actions . Washington: National Academy of Public Administration, 1979. American Institute of Planners and U.S. Department of Housing and Urban Development. Coordinating State Functional Programs: Strategies for Balancing Conflicting Objectives . Washington: U.S. Department of Housing and Urban Development, 1977. Bearse, Peter J. "Government as Innovator: A New Paradigm for State Economic Development," New England Journal for Business Economics , Spring 1976, pp. 37-57. Clark, Marsha. The Contribution of Economic Development Agencies to Economic Growth and Revitalization in Seven States . Baltimore: Johns Hopkins University, 1978. Cornia, Gary C. , William A. Testa and Frederick D. Stocker. State-Local Fiscal Incentives and Economic Development . Columbus, Ohio: Academy for Contemporary Problems, June 1978. Council of State Community Affairs Agencies. States and Their Communities: A Partnership for Revitalization . Washington: Council of State Community Affairs Agencies, 1978. Council of State Governments. Innovations Transfer Series . Lexington, Kentucky: Council of State Governments, 1978-1979. Council of State Planning Agencies. State Planning Series . 16 vols. Washington: Council of State Planning Agencies, 1977 „ Daniels, Belden. Role of Capital in State Economic Development . Cambridge: Harvard University, 1979. Daniels, Belden and Michael Kieschnick. Theory and Practice in the Design of Development Finance Innovations . Washington: Council of State Planning Agencies, 1978. -60- Hamilton-Rabinovitz, Inc. The Urban Policy Role of the States . Paper prepared for U.S. Department of Housing and Urban Development, August 1979, unpublished. Harrison, Bennett and Sandra Kanter. "The Political Economy of States' Job-Creation Business Incentives," American Institute of Planners Journal, October 1978, pp. 424-35. Kettering Foundation. Negotiating the City's Future . Dayton, Ohio: Charles F. Kettering Foundation, 1979. National Academy of Public Administration. The States and Urban Strategies: A Comparative Analysis . Washington: National Academy of Public Administration, forthcoming. National Council on Urban Economic Development. State Actions to Stimulate Development : A Catalog . Washington: National Council on Urban Economic Development, forthcoming. National Governors' Association. Bypassing the States: Wrong Turn for Urban Aid? Washington: National Governors' Association, 1979. Pascal, Anthony H. , et_. al. Fiscal Containment of Local and State Government. Santa Monica: Rand Corporation, 1979. Peirce, Neal R. , Jerry Hagstrom and Carol Steinbach. Economic Development: The Challenge of the 1980' s . Washington: Council of State Planning Agencies, 1979. Petersen, John E., C. Wayne Stallings and Catherine Lavingne Spain. State Roles in Local Government Financial Management: A Comparative Analysis. Washington: Municipal Finance Officers' Association, Government Finance Research Center, 1979. U.S. Small Business Administration. Directory of State Small Business Programs . Washington: USGPO, 1979. U.S. Small Business Administration. The States and Small Business: A Report on the First National Conference on State Small Business Programs . Washington: USGPO, 1979. Vaughan, Roger J. State Taxation and Economic Development. Washington: Council of State Planning Agencies, 1979. -61- APPENDIX SURVEY OF URBAN OFFICIALS' VIEWS ON STATE ECONOMIC DEVELOPMENT POLICY The poll results cited in the text are derived from a survey of economic development practitioners in Urban Consortium jurisdictions, conducted for the Consortium by Public Technology, Inc. (PTI). The questionnaire form was sent to 25 Urban Consortium jurisdictions in February 1980. Twenty-three Consortium jurisdictions participated in the survey. Survey responses were recorded by telephone during February and March 1980. Readers should note that the survey results are indicative of the views of economic development officials in Urban Consortium jurisdic- tions only, rather than local governments in general. Similarly, the jurisdictions surveyed are located in 18 states; survey results pertain only to economic development policies conducted by those states. The officials responding to the poll tended to be highly ranked or mid-level officials in a city's or urban county's economic development agency. A survey of mayoral staff or local legislators may well have yielded different results. Despite these caveats, the PTI survey provides insight into the views of economic development practitioners in large highly urbanized jurisdictions on the subject of state economic development policy. Following are a listing of the cities and urban counties participating in the survey, a copy of the questionnaire form, and a tabulation of survey responses. -62- CITIES AND URBAN COUNTIES REPRESENTED IN THE PTI SURVEY OF URBAN OFFICIALS' VIEWS ON STATE ECONOMIC DEVELOPMENT POLICY Atlanta, Georgia Baltimore, Maryland Boston, Massachusetts Chicago, Illinois Columbus, Ohio Dade County, Florida Dallas, Texas Denver, Colorado Detroit, Michigan Houston, Texas Indianapolis, Indiana Kansas City, Missouri King County, Washington Los Angeles, California Memphis, Tennessee Milwaukee, Wisconsin New York, New York Philadelphia, Pennsylvania Phoenix, Arizona Pittsburgh, Pennsylvania St. Louis, Missouri San Diego County, California Seattle, Washington N = 23 -63- AN INFORMAL SURVEY OF CENTRAL CITY OFFICIALS ' VIEWS ON STATE ROLES IN URBAN ECONOMIC DEVELOPMENT Intent The attached survey questions are intended to aid the staff of the Urban Consortium's Community and Economic Development Task Force in preparing an information bulletin on the role of the state in urban economic development. The bulletin, now underway, explores the issue of state involvement from the perspective of large cities. Little research to date has approached the subject of appropriate state roles in economic development from a central city perspective. To bring candid, first-hand information to the bulletin, this short, informal survey is intended to provide us with a sense of 1) the cur- rent level and nature of state and central city interaction and cooper- ation in urban economic development projects in Consortium cities; and, perhaps more important, 2) the perceptions and attitudes of local economic development officials about the value and consequences of in- creased state involvement in urban economic development in their own cities. All individual survey responses will be kept confidential. Aggre- gate findings, however, may be incorporated in the bulletin. The bul- letin is one of a set of eight being prepared by Public Technology, Inc. (PTI) for the Urban Consortium on priority economic development research topics. The project is supported by a grant from the U.S. Economic Development Administration. For your convenience Urban Consortium staff will be telephoning you the week of February 18 to record your responses and any additional thoughts you have on the subject of state urban economic development. If you have any questions on the questionnaire, or on any aspect of the project, feel free to call Carol Shapiro (202) 452-7749 or Leanne Aronson (202) 452-7720. We greatly appreciate your help. -64- AN INFORMAL SURVEY OF CENTRAL CITY OFFICIALS' VIEWS ON STATE ROLES IN URBAN ECONOMIC DEVELOPMENT la) Taking a retrospective look at the long-terra history of actions, policies and programs of your state, would you say that these have tended to favor central cities, suburbs, small towns, or rural areas? b) Do you think this pattern still exists today? c) To your knowledge, has your city attempted through legislation or other means - to expand the role of your state in urban economic development? If so, what city action was undertaken, and what was the impact? 2a) To the best of your knowledge, has your state developed economic development policies or programs over the past 5 years which have had a discernible 1) positive, 2) neutral or 3) negative impact on center city development? Please consider the areas of state involvement listed below and indicate the effect on center city development. (Additional space is available for illustrative examples and additional comments). Areas of State Involvement : a) Business Site Development Aid Comment : Effects on Center City : 1 2 3 b) Aid for Business Facilities Development Comments: 1 2 3 c) Job Training Comments: 1 2 3 d) Small Business Aid Comment : 1 2 3 e) Legislation Affecting Local Development Powers Comment: 1 2 3 f) Legislation Affecting Local Taxing Powers Comment: 1 2 3 -65- Areas of State Involvement : g) Environmental, Water, Air Quality Regulations Comment: Effect on Center City : 1 2 3 h) Education Finance Aid Comment : 1 2 3 i) State Revenue Sharing Program Comment: 1 2 3 j) Transportation Funding Comment : 1 2 3 k) Location of State Facilities Comment : 1 2 3 1) Other Comment: 1 2 3 b) Does your state formally coordinate the development activities listed above with your city? Please indicate, "Yes" or "No" in the extreme right column. If "Yes," how is coordination facili- tated, (e.g., written agreement? etc.) and at what stage of plan- ning or implementation is the city involved? (indicate responses in the "comment" spaces below each part.) c) Which of the state initiatives indicated above do you regard as most important for center city development? 3a) From which source (s) do you receive most of your information about state economic development activities? 1. Formal briefings by governor, executive branch officials or their staffs. 2. Formal briefings by state legislators or their staffs. 3. Informal contacts with state executive branch and legislative officials and their staffs. 4. Municipal or county league publications and/or meetings. 5. Newspapers, radio, television, and/or press releases. 6. Other (please specify). 7. Receive little or no information about state economic develop- ment activities. -66- b) Overall, would you say the quality of information your city re- ceives on state development activities is excellent, good, fair, inadequate or poor? 4) States are funded through EDA's 302 program to develop state-wide economic development plans. a) Does your state prepare a 302 economic development plan? b) If so, is your city involved in the formulation of this plan? c) In your estimation, does your state's 302 plan adequately reflect your city's conditions and needs? d) Are the data contained in these plans used by your city? If so, for what purpose? 5a) Have any joint state/central city development activities been undertaken in your city in the past 5 years? If so, could you identify and describe a few successful and/or unsuccessful examples in the space provided below? • State/central city development venture, #1 • State/central city development venture, #2 • State/central city development venture, #3 b) In your estimation, what has been the impact of these activities on development conditions in your city? 6) We're interested in any additional thoughts you'd like to share about state influences on economic development conditions in your city. Generally, do you think an expanded state role in urban economic development will help or hurt your city? Why? -67- URBAN OFFICIALS' VIEWS OF STATE ECONOMIC DEVELOPMENT POLICY: SURVEY RESULTS 1 a) OVER THE LONG RUN, STATE ECONOMIC DEVELOPMENT POLICIES PROGRAMS HAVE FAVORED... # respondents suburbs 3 central cities 2 small towns, rural areas 11 suburbs, small towns 1 rural areas 2 suburbs, small towns, rural areas 3 , no opinion 1 SUMMARIES FINDINGS: central cities areas outside central cities no opinion 1 b) # respondents 2 20 1 DOES THIS PATTERN STILL PREVAIL? # respondents State still favors areas outside 13 central city, but displays greater awareness of, attentiveness to suburban, small town, rural problems AND %* 13 9 48 4 9 13 4 N - 23 %* 9 87 4 N %* 57 23 State still favors small towns, rural areas, suburbs States still favors central city, but 2 displays greater awareness of, attentiveness to suburban, small town, rural problems 26 State has changed economic development aid 1 patterns to assist central cities as much as other areas 4 No opinion N - 23 1 c) HAS CITY TAKEN ACTION TO ENCOURAGE STATE ROLE IN URBAN ECONOMIC DEVELOPMENT? # respondents %* City lobbies for state legislation 11 48 aiding city development objectives -68- URBAN VIEWS ON STATE DEVELOPMENT POLICY # respondents %* Extensive cooperation between city 1 4 and state executive branch on development issues Informal city/state cooperation to 2 9 enhance state role Limited city/state cooperation on certain 1 4 development issues No city effort to expand state role 7 30 No Opinion 1 4 N = 23 2 c) MOST IMPORTANT STATE URBAN ECONOMIC DEVELOPMENT INITIATIVES FOR CENTRAL CITY. . . Number of times item cited Business site development aid 5 Business facilities development aid 7 Job Training 4 Small Business Aid 1 Expanding Local Development Powers 12 Expanding Local Taxing Powers 5 Environmental, Air, Water Quality Regulations 3 State/Local Education Finance Aid 2 State/Local Revenue Sharing 4 Transportation Funding 5 Location of State Facilities 2 3 a) PRIMARY SOURCE (S) OF INFORMATION ABOUT STATE ECONOMIC DEVELOPMENT POLICY # respondents %* Informal contacts with state 16 70 officals and staffs Municipal/county league publications 2 9 Formal briefings/informal contacts with 1 4 state officials and staffs City lobbyists, local development league 1 4 Informal contacts with state officials and 1 4 mass media Informal contacts with state, municipal/ 1 4 county league publications, mass media 1 4 Receive little or no information N = 23 -69- URBAN VIEWS ON STATE DEVELOPMENT POLICY SECONDARY SOURCE (S) OF INFORMATION ABOUT STATE DEVELOPMENT POLICY # respondents %* Municipal/county league 3 13 publications Mass media 2 9 Mass media and informal contacts with 1 4 state Mass media and municipal/county league 2 9 publications Summary findin g: mass media or muncipal/ 8 35 county league publications used N = 23 as secondary source 3 b) QUALITY OF INFORMATION RECEIVED ABOUT STATE ECONOMIC DEVELOPMENT EFFORTS # respondents %* Excellent Good 5 22 Qualified good (good, but too sparse, 3 13 or not applicable to city) 5 22 Fair 9 39 Inadequate 1 4 Poor N = 23 4 a) STATE PREPARES 302 PLAN # respondents %* Yes 15 65 Not sure/don't know 6 26 No formal state 302 plan, but 2 9 other state planning activities N = 23 financed with 302 funds b) CITY INVOLVED IN FORMULATION OF STATE 302 PLAN # respondents %* Yes 1 4 Yes, but involvement limited, sporadic 3 13 Not sure/don't know 3 13 No 14 61 No formal state 302 plan, but city has 2 9 worked with state on other 302-financed N 3 23 activities summary finding : # respondents %* City involved in state 302 planning 6 26 activities -70- URBAN VIEWS ON STATE DEVELOPMENT POLICY # respondents %* City not involved in state 302 14 61 planning activities Not sure/don't know 3 13 N = 23 c) DOES STATE 302 PLAN ADEQUATELY REFLECT CITY'S NEEDS AND/OR ECONOMIC CONDITIONS? # respondents %* Yes 2 9 No 6 26 Not sure/don't know 13 57 No formal state 302 plan; other 302- 2 9 financed activities do not reflect N = 23 city needs summary finding : # respondents %* Yes 2 9 No 8 35 Not sure/don't know 13 57 N = 23 d) CITY MAKES USE OF DATA GENERATED BY STATE 302 PLAN # respondents %* Yes 2 9 No 13 57 No, but intends to do so in future 1 4 because of recent state outreach activities Not sure/don't know 5 22 No formal state 302 plan; data generated 2 9 by other state 302 activities not used N = 23 by city summary finding : # respondents %* Yes 2 9 No 16 70 Not sure/don't know 5 22 N ■ 23 5 a) JOINT CITY/STATE ECONOMIC DEVELOPMENT VENTURE (S) UNDERWAY # respondents %* Yes 18 78 No 5 22 N = 23 -71- URBAN VIEWS ON STATE DEVELOPMENT POLICY b) NET IMPACT OF JOINT VENTURES Very positive Positive Minimal /marginal Too soon to tell Negative summary findings : Very positive/positive Minimal/marginal/too soon to tell Negative # respondents # respondents 9 8 1 %* 5 28 4 22 4 22 4 22 1 6 N = 18 %* 50 44 76 N = 18 6 a) DO YOU THINK AN EXPANDED STATE ROLE IN URBAN ECONOMIC DEVELOPMENT WOULD HELP OR HURT YOUR CITY? # respondents %* Supports expanded state role: 5 22 expanded state role would induce state to address urban economic development programs more comprehensively Supports expanded role only if state undertakes projects supportive of central city need; collaborative relationship which preserves local autonomy desired; state role should be "indirect." 15 65 Does not support stronger state role; 2 stronger state role would hurt central city Indifferent: primary intergovernmental 1 influence on urban economic development is federal government; expanded state role wouldn't make very much difference summary finding : Unconditional support for stronger state role Conditional support for stronger state role # respondents 15 N = 23 %* 22 65 -72- ) URBAN VIEWS ON STATE DEVELOPMENT POLICY # respondents %* Indifferent about expansion 1 4 of state role Opposes stronger state role 2 9 N = 23 6 b) OTHER VIEWS ON STATE/CITY RELATIONSHIPS IN THE AREA OF DEVELOP- MENT POLICY (IN RESPONSE TO OPEN-ENDED QUESTION) # respondents %* State feels that city has resources 12 52 to take care of its own needs; therefore, state development policy oriented toward needs of smaller jurisdictions Primary source of intergovernmental aid 5 22 for city is federal government, not state Improved state/city coordination, coopera- 4 17 tion on urban economic development issues would be desirable State legislature is dominated by 5 22 representatives from suburbs, small towns N = 23 and rural areas; the composition of the legislature makes it more difficult to enact development legislation directed toward central city needs *Rounded to the nearest full percentage point, totals may not sum to 100% due to rounding. **Rounded to the nearest full percentage point; items represent the most frequent responses to an open-ended question asking urban officials' views on state-city economic development relationships, and therefore do not sum to 100%. -73-